Life-threatening illnesses and problems that need a lot of medical care often lead to a need for immediate cash income. In many states, your life insurance policy may be a source of income through the acceleration of the policy's death benefit, known as "living benefits." You can get these benefits in different ways, such as viaticals (sale of the life insurance policy) and loans against the face value of the life insurance policy (from the original insurance company or from a third party). The Life Insurance Settlement Association can give you more information on ways you may be able to use your life insurance policy. Visit them online at www.thevoiceoftheindustry.com, or call 407-894-3797.
Viaticals
A viatical is the sale of a life insurance policy for cash. The person insured (called the viator) sells his or her life insurance policy to a third party. As with any sale, both sides must agree on what is being sold and how much it is being sold for.
A viatical transaction usually takes place when someone has a limited time to live. The person's life expectancy may be less than 6 months or as long as several years and must be certified by a doctor. The insured person is probably unable to work and is likely to have a low income. To reduce money worries, the person sells the life insurance policy for a lump-sum cash payment. The payment is often between 60% and 80% of the face value of the policy, and is usually tax-free. This payment is given only to the person who holds the policy.
A viatical insurance company buys policies from people with terminal illnesses. The viatical company becomes the new owner and the only beneficiary of the policy. It pays the premiums on the policy as long as the patient is alive. When the person dies, the death benefit (payout) from the policy goes to the viatical company.
Reasons for choosing a viatical:
- To pay for food, shelter, doctor visits, or other pressing needs
- To ease the stress of money worries
- To fulfill a life-long dream
Drawbacks of a viatical:
- Your heirs get no insurance money.
- You may not make the best trade available.
- Decision-making may be difficult.
- Once a policy is sold, the sale is usually not reversible.
Line of credit from a finance company
People with cancer who are not expected to live a long time can transfer their life insurance's death benefit to a finance company. The company reviews your health status, then makes "cash advances" on the expected benefit. This is actually a loan, and as with all loans, interest rates vary. You may borrow up to 35% to 75% of your insurance's death benefit depending on your situation. The death benefit is then reduced by the loan amount, the premiums the company pays on the policy, fees, and the interest on the loans you have taken out. Not all life insurance is eligible, and this type of loan is not offered by all companies.
Living benefits and other choices
You also have other choices. For instance, you may be able to get a personal loan, or, instead of selling your policy outright to a third-party viatical company or transferring your death benefit, you may be able to get more money from the original insurance company. Many insurance companies make it possible for life insurance policy owners to collect part of their death benefits early -- before dying -- to cover extraordinary expenses. A life insurance policy usually pays benefits to a beneficiary after a policy owner dies. But in certain cases, those benefits are accelerated and are paid directly to a chronically or terminally ill policy owner before he or she dies. These are called living benefits or accelerated benefits.
In general, living benefits can range from 25% to 95% of the death benefit. The payment depends on your policy's face value, the terms of your contract, and the state you live in. Ask your insurer to provide you with a quote before you use your accelerated death benefit option. Living benefits are not intended to replace health insurance or long-term care insurance. But they can give you extra help with needs that result from terminal or catastrophic illness. Contact your insurance agent or life insurance company for details on your policy's accelerated benefits plan.
For more information regarding living benefits from life insurance, please contact the American Council of Life Insurers Web site at 202-624-2000 or www.acli.com.
Another choice is to get a loan from a third party. Some companies will lend money to terminally ill people who have a life expectancy of between 6 months and 5 years. The patient's life insurance policy is used as collateral. The company will lend a portion of the policy's face value, usually ranging from 35% to 85%, which will be paid back from the proceeds of the policy at the time of the patient's death. Any surplus funds then go to the original beneficiary. The interest rates on the loans are often high, but there are no restrictions on how the borrowed money may be used.
Signing a contract for a viatical or living benefits: Before you make a final decision, think about the points below. Talk to a lawyer or a financial planner to help you decide what is best in your case.
- Get a clear picture of what's involved. Read about viaticals, loans, and living benefits. Ask questions.
- Get professional advice about the types of living benefits available and the pros and cons of each.
- Decide whether a viatical is really the best course of action for you.
- Talk to your doctor about how long you can expect to live.
- Find out if Medicaid or other benefits will be affected.
- Shop around. Get several bids. Bids can vary a lot.
- Find out if the company is a broker. Some companies use their own money to buy policies, but others are brokers. A broker gets a commission from the company and may not act in your best interest.
- Negotiate; you might get a better deal.
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