If your loved one has a life insurance policy, he or she may be able to collect money early to help pay for care and expenses.

Living Benefits

Also called advance or accelerated benefits, living benefits are the proceeds from life insurance policies that may be paid to policyholders before they die. Many life insurance policies include an accelerated benefits provision. Companies offer anywhere from 25 to 100 percent of the death benefit as early payment, but policyholders can collect these payments only under very specific circumstances. The amount and the method of payment vary with the policy.

If your loved one owns a life insurance policy, call his or her state insurance commissioner or his or her insurance company’s Claims Department to find out about alternatives. Ask whether your loved one’s life insurance policy allows for accelerated benefits or loans, and how much these benefits will cost. Some insurers add accelerated benefits to life insurance policies for an additional premium, usually computed as a percentage of the base premium. Others offer the benefits at no extra premium, but charge the policyholder for the option if and when it is used. In most cases, the insurance company will reduce the benefits advanced to the policyholder before death to compensate for the interest it will lose on its early payout. There also may be a service charge.

Viatical Settlements

Viatical settlements involve the sale of a life insurance policy to a viatical settlement company, a private enterprise that offers a terminally ill person a percentage of his or her life insurance policy’s face value. The viatical settlement company then becomes the beneficiary of the policy, pays the premiums, and collects the face value of the policy after the original policyholder dies.

Each viatical settlement company sets its own rules for determining which life insurance policies it will buy. But there are some guidelines that most companies follow when buying life insurance policies.

• In general, the policy must be at least two years old.
• The current beneficiary will probably have to sign a release or a waiver
• The original policyholder must be terminally ill. Many companies require a life expectancy of two years or less.
• Your loved one will probably have to sign a release allowing the viatical settlement provider access to his or her medical records.
• Most companies will require that the company issuing your loved one’s life insurance policy be financially sound. If the life insurance policy is provided by an employer, the viatical company will want to know if it can be converted into an individual policy or otherwise be guaranteed to remain in force before it can be assigned.

Points To Consider

Decisions affecting life insurance benefits can have a profound financial and emotional impact on dependents, friends, and caregivers. Before helping a terminally-ill loved one make any major changes regarding a policy, talk to friends and family as well as to someone whose advice and expertise you can count on—a lawyer, accountant, or financial planner. Make sure both you and your loved one understand how a viatical settlement will affect his or her tax status, access to government benefits, and other financial matters.

Since 1997, proceeds from accelerated benefits and viatical settlements have been tax-exempt as long as the seller’s life expectancy is less than two years and the viatical settlement company is licensed—if your loved one lives in a state that requires licensing. If the state doesn’t require viatical settlement companies to be licensed, state law will still require that these companies meet certain standards.

Most states also have declared payments of accelerated benefits or viatical settlements to be tax-exempt. However, some states do not give these payments tax-free status. Because of the complexity of the situation, seek advice from a tax professional in your loved one’s community.

Collecting accelerated benefits or making a viatical settlement also may affect your loved one’s eligibility for public assistance programs based on financial need, such as Medicaid. If your loved one cashes in his or her life insurance policy and receives a payment, the money may be counted as income for Medicaid purposes and may affect his or her eligibility.

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Adapted from Viatical Settlements, developed by the United States Federal Trade Commission.