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Beyond
Viatical Settlements
The Loan Alternative
Consider a tax-free loan from the party most interested
in your policy: your beneficiary. If he or she can not manage a
loan, contact your Individual Benefits counselor to discuss alternatives.
With your policy as collateral, it's often very easy to come to
an agreement on a rate of interest on a loan from friends, relatives,
employers, or companies.
Accelerated Benefits
Also known as "living" benefits, when you
can't raise a loan, see if your policy provides for a partial advance
on its death benefits. In effect, you make yourself your own beneficiary.
You'll have to ask, because it's a recent development and it might
not have made it to the printed page yet.
This option may only be available on policies beyond
the contestability period. The life expectancy required is consistent,
probably 12 months or less.
Sometimes there are restrictions on how you can spend
the money, e.g. applying it exclusively to medical expenses, which
does not always include alternative treatments. What's more, many
insurance companies charge a processing fee.
In addition, there's a lot of diversity among insurance
companies and what percentage of the policy they will offer you
- - generally between 25% and 92% of the face value.
If you do take an accelerated benefit, to get the
most out of your policy, consider selling the remainder of the policy
in a viatical settlement. The net result is that you'll receive
more money by using this two-step approach.
For instance, suppose the company offers you 50%
of your $50,000 policy. You can still sell the other $25,000 at
70%. You'll come out further ahead than if you simply went with
one or the other alternative.
Cash Surrender
Usually inadvisable, consider this only when
no other option is open to you. You'll get money by surrendering
the policy, which in effect, cancels the policy. The seller frequently
takes a big hit on this one because of the surrender charges. Don't
do it if you don't have to.
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The
Viatical Solution
" Informed consumers make the best clients."
- Individual Benefits
Medical Requirements For A Policy Sale
Anyone with a shortened life expectancy could potentially
sell a life insurance policy. The medical estimates -- whether for
multiple sclerosis, AIDS, lupus, cancer, or any other life- threatening
disease -- are based on nationwide statistics. That could work in
your favor. For instance, if you have cancer and osteoporosis, make
it clear when you apply for a settlement; it may statistically work
to shorten your life expectancy, thereby improving your settlement
options.
All Policies Are Not The Same.
In principle, because they are private property, life insurance
policies -- term or permanent, individual or group -- can be sold.
In practice, that isn't always the case.
FEGLI
These are great policies to have. Federal Employees'
Group Life Insurance contains neither suicide nor contestability
clauses. In October 1994, FEGLI became assignable; you can now sell
it whether you are working, retired, or on disability. Unfortunately,
however, some federal agencies are not aware of your right to assign
your coverage, but IBI has been working with OPM since 1994 on this.
Please talk to IBI or a financial advisor if your Benefits Office
or Human Resources Department tell you that you have no rights to
make an assignment or sell your coverage.
There's more good news: normally, the turnaround
time is fast, because of IBI's familiarity with this coverage and
our good working relationship with OPM. You should be aware that
the offers tend to be slightly higher for FEGLI policies because
the insured has to continue paying the premiums on the coverage
after it has been assigned.
Anyone with a life expectancy of less than nine months
is eligible for a special, excellent benefit that the government
offers through OPM. This benefit applies to the basic coverage only
(salary + $2,000), but will pay around 94% to the insured.
It should be noted, however, that an insured who
takes this path, can NOT sell any optional coverage to a viatical
company. In other words, either sell basic coverage to the government,
or sell part or all of the basic and optional coverage to a viatical
company.
Group Association Policies
Policies issued by such groups as Savings Bank Life
Insurance (SBLI), Citicorp, Life Investors (American Express), and
other credit card companies are considered to be group policies.
However, they are good policies to have, because the insured generally
have the same rights of ownership as they would with an individual
policy, but without having to pay the high premiums associated with
an individual policy. In general, the lower the premiums are for
the policy, the higher the offer will be.
Group Policies
If the policy allows for an absolute assignment and/or
an irrevocable beneficiary, then in some circumstances, the coverage
can be sold if you are still working. However, all group policies
are different, and some may contain restrictions on assignability,
beneficiary designations, and conversion rights; they may even contain
certain cancellation risks. If you are on long-term disability or
a waiver of premium, this will make your coverage more stable and
attractive to a viatical company. IBI will be happy to examine your
coverage and give you some expert advice on how to proceed.
Just so you know, the ERISA Act of 1974 requires
employers to furnish information concerning all benefits when an
employee requests it. The law mandates full and timely disclosure
once a request is made. That information will help you decide what
to do and will help your viatical company make its decision also.
VGLI/SGLI
Serviceman's Group Life Insurance (SGLI) and Veteran's
Group Life Insurance (VGLI) must be converted to an individual commercial
policy before they can be sold. The insured has no rights to assign
this coverage or name an irrevocable beneficiary as long as the
coverage remains within the SGLI or VGLI groups. However, legislation
has just been passed that allows a veteran to convert as soon as
he or she is out of service (in other words, at the time the option
to convert to VGLI coverage is given.) However, the premiums for
the newly converted policy will be substantially higher than the
group VGLI rates, so it is very important for any veteran to research
what kind of offer he might expect, before converting the policy.
To convert your coverage, call your Veterans' Department at 1-800-419-1473
and request your conversion papers. Individual Benefits would be
happy to discuss your current situation with you, as well as generate
"contingent" offers, so that you will know what kind of
settlement to expect, prior to committing to the more expensive
policy.
Not Under Any Conditions
Contestability provisions and suicide exclusions
are usually in effect for the first two years of a policy. Both
make it possible for an insurance company to deny payment. Both
make it very difficult to sell a policy during those periods. Some
insurance companies may take advantage of the conversion from group
to individual insurance to again impose contestability and or suicide
provisions for a further two years. In some states, this is not
allowed; make sure you know the law.
There can be other obstacles to a sale. A policy
may be bound by a judicial order such as a divorce decree, a tax
lien, or a collateral assignment. Also, restrictions on how it can
be assigned, who can be the beneficiary, and how much you may retain
from a group policy on conversion will prevent the sale. These provisions
are not always set in stone, however, so seek professional advice.
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Taxes
And Creditors
" Leisure with dignity."
What You Owe On What You
Get
Federal
Something great happened on August 3, 1996. Both
Houses of Congress approved legislation to eliminate federal income
tax on the proceeds of viatical settlements and accelerated death
benefits. President Clinton has signed the bill, which will go into
effect January 1, 1997.
Settlements which close after that date will qualify,
given two stipulations. First, the viator must be certified as terminally
ill -- that is, have a life expectancy of 24 months or less at the
time of the transaction. Second, If a viator's resident state requires
providers to be licensed, only transactions by licensed viatical
settlement companies will be tax free.
Until then, however, we are not required by law to
provide any information or records about this transaction to state
or federal government taxing agencies, and no 1099 forms will be
issued relating to your transaction.
Closer To Home
Some states and cities offer or are considering tax-free
treatment of viatical settlements. Consult with an attorney and/or
cpa or financial planner.
Creditors may have a claim on your settlement, but
state laws vary widely on their rights. The same applies to bankruptcy
judgments. Again, consulting an attorney is your best recourse.
How The Settlement Affects Federal And State
Assistance
Any assistance -- state or federal -- which stipulates
a cap on earnings could be reduced or discontinued until you've
spent enough of the settlement to meet the conditions again. There
are ways around this. Placing the policy in a special needs trust
is one way. Another is to shift ownership to someone you trust,
through a bona fide transfer, so a third party technically owns
the funds.
State Regulation Of Viatical Settlements
States which require viatical settlement companies
to be licensed are doing you a favor. You're better protected as
a consumer when settlements are regulated. Such a state, for instance,
guarantees that you can change your mind after you accept an offer,
even if you signed a waiver of the 15-day rescision period.
The National Association of Insurance Commissioners
(NAIC) has proposed a national consumer protection act that would
apply to unregulated states. Someday licensing may be required in
every state. Until then, the following states currently regulate
viatical settlements: California, Florida, Indiana, Iowa, Kansas,
Louisiana, New Mexico, New York, North Carolina, North Dakota, Texas,
Vermont, and Washington.
Whatever you may have heard to the contrary,
licensees are required to keep settlement information confidential.
Similarly, state regulatory agencies, which are gathering data on
transactions, do so by means of codes, rather than names,
furnished by the settlement companies.
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Making Wise Choices
" The universe is change; our life is what
our thoughts make it."
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- Marcus Aurelius
Antoninus |
Contact your state insurance regulatory commission
to determine licensing requirements and whether the settlement companies
under consideration are in compliance.
Talk to the state attorney general's office to find
out if any substantive complaints have been lodged against the companies
you're considering.
Ask about confidentiality. Not every company will
protect your privacy.
Before you choose one, check with several viatical
settlement companies to see how competitive each one is and to familiarize
yourself with the life expectancy ratios. For instance, a company
may offer 65% of a policy's face value to someone with a two-year
life expectancy, but 85% for someone expected to live six months
or less.
Take the time you need to make a decision. Ignore
high- pressure tactics. You are not obliged to accept any offer,
and even if you have, make sure you can still change your mind within
15 days.
Be extremely suspicious of any company that will
give you any kind of offer before having your medical records reviewed.
Before you accept the offer, make timely payment
one of the conditions of the settlement.
An offer involves no obligation on your part.
You don't have to accept it.
You can change your mind. Many states legally guarantee
you a 15-day period during which you can rescind the sale, even
if you have signed a contract waiving the right to change your mind.
If the purchasing company doesn't do so automatically,
ask that an escrow account be set up with a good financial institution,
just to be sure that funds equal to the offer are readily available.
Other Considerations
While you are mulling over a decision on your
policy, don't forget your Will. Without it, all your goods will
be disbursed in accordance with your state's law, which may not
be at all what you'd like. To make sure your wishes are carried
out, execute a Will with an attorney or get one of the do-it-yourself
kits carried by many office supply and other companies.
Get professional investment advice, so that
you make the best use of your settlement and other funds available
to you.
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