There's a sea of knowledge about the viatical industry; some people jump in and emerge completely dry. If you want to get your feet wet, here's a short do-it-yourself seminar positively dripping with information about your options.
While you work with Individual Benefits, we suggest that you consult your attorney and/or cpa for disinterested, professional recommendations. And we're going to repeat that advice, ad infinitum and nearly ad nauseum, simply because it's some of the best advice you'll get. Naturally, IBI will also be happy to work with your consultant at your request.
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.
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.
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.
The Viatical Solution
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 NotThe 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.
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.
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.
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.
What You Owe On What You Get:
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.
The Viatical Settlement: Making Wise Choices
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