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Unmarried Cohabitants: Financing Terminal Illness Through End-of-Life Management

Unmarried Cohabitants: Financing Terminal Illness Through End-of-Life Management

Unmarried Cohabitants: Financing Terminal Illness Through End-of-Life Management

When the average life expectancy was 55 or 60 and AIDS was not an issue, we didn't concern ourselves with planning for long-term care and terminal illness. But with new and devastating illnesses and the explosion of costs and difficulties in the health care field, the rules have changed.

What was covered by health insurance yesterday can be either covered to a much lesser degree -- or not at all -- tomorrow. This places us -- and those we care about -- in a situation where end-of-life health care costs can devastate us, our families, our partners, and those we love. Struggling with terminal illness is bad enough, but when coupled with financial difficulties, end-of-life issues can become unbearable.

There are a number of planning tools to help deal with "end-of-life management:" advance directives, durable powers of attorney, living trusts, Medicaid trusts, understanding health benefits, qualification for Medicare and Medicaid, long term care options, and viatical settlements.

You must become informed about the issues that may not only you, but also your partners, families, and loved ones. Planning to help the terminally ill is fast becoming more and more important, and viatical settlements can play a prominent role.

What Is A Viatical Settlement?

You've probably seen those insurance company television advertisements showing how a terminally ill woman facing an end-of-life financial crisis can receive all or a portion of her death benefit when she needs it--before she dies. Depending on the policy language, the advance payments of death benefits, called "accelerated benefits," may be paid to an insured upon the diagnosis of a terminal illness, the onset of a catastrophic illness, nursing home confinement, or even the need for extraordinary medical intervention -- like an organ transplant.

At the death of the policy holder, the benefits which were advanced during the the last stages of life will be deducted from the death benefit ultimately paid to the beneficiary of the policy. Although the right to receive accelerated benefits may be provided for in the policy itself, more likely than not they are authorized by riders added to new or existing policies.

But there are problems:

Not everyone who may need advance payments qualifies under their insurance company's guidelines; not every policy offers an accelerated benefit; and finally, the insurance company's accelerated benefit may fall short of the insured's expectations or desires.

In these and other instances, a terminally ill person can turn to a third party private company which offers the same type of service. These transactions are called "viatical settlements."

The word "viatical" comes from a latin word meaning provisions or supplies for a journey. Since the "journey" we are talking about here is death, viatical settlements then are discounted, pre-death sales of life insurance policies to private funding sources in order for the terminally ill person to use a percentage of the face value of his or her life insurance when he or she really needs it-- on the journey that will end in death.

Through a viatical settlement, the terminally ill insured -- called the "viator" -- receives cash for whatever purpose he or she desires to use it: to pay current living expenses, to maintain the highest level medical care, to travel, or to finance a life-long goal. In return, the viatical settlement company purchases and receives all rights to the policy, including the right to name the beneficiary.

Unlike accelerated benefits riders which pay up to 90 percent of the death benefit if the holder of the rider has six months to live, viatical settlements assist not only those with short life expectancies, but also those with longer life expectancies -- 18 to 24 months or more -- in order to help provide quality of life needs in a meaningful way.

The percentage of the face value paid to a viator depends upon a number of factors: the projected remaining life expectancy, the face amount of the policy, whether the premium has been waived because of disability, the potential of medical technological developments prolonging life expectancy, the risk of litigation, the type of policy, and interest rate fluctuation.

How Do Viatical Settlements Work?

When you purchase an insurance policy on your life, your home, or your automobile, you seek out an agent you trust to advise you of the best coverage for the premium dollar. Because there are a growing number of viatical settlement firms, because this industry is largely unregulated, because you have probably seen advertisements in a number of publications touting viatical settlements, and because there are many technicalities and potential pitfalls involved, it is best to rely upon an experienced viatical settlement broker who can "shop" the various settlement companies and help negotiate the best arrangement for the terminally ill person. There is no charge to the insured for the service as, like an insurance broker, the viatical broker is paid by the funding source only if the transaction is closed.

In considering the purchase of life insurance policies, viatical settlement firms have certain criteria which may bear on the transaction. These factors include....

1. The policy must be with a financially stable insurance company.

2. The viator must release of all medical records for review by the viatical settlement company and co-operate with the settlement firm's medical staff which makes an independent estimate of life expectancy.

3. The viator must be willing to transfer full policy ownership to the settlement firm or, where the policy is subject to ERISA, make absolute assignment to the firm.

4. All former beneficiaries of the policy must consent to the transaction.

5. The policy contestability clause must have been satisfied.

6. The viator must provide a statement of mental competency from his primary care physician or mental health specialist.

Group life policies and self-insured company policies are more difficult to deal with than individual policies because there are additional considerations, such as (a) the stability of the group, (b) the effect of the assignment and changing the beneficiary to someone who is not related to the insured, (c) the financial stability of the self-insured group, and (d) the examination of the conversion provisions, if any, to determine if the insured qualifies to exercise the conversion option.

To determine the percentage of face value to be paid, the terminally ill applicant is "underwritten" by the settlement firm based not only upon life expectancy, but also such other factors as (a) cash loans on the policy, (b) future premium expenses if there is no disability waiver of premium, (c) the potential that the insurance company might enter bankruptcy, (c) the administrative costs of securing releases from former beneficiaries and loved ones, and (d) medical and legal fees allocated to the review of each case.

Should the family of the applicant not co-operate, the settlement firm will generally not purchase the policy. Because the administrative process is involved, difficult, and time-consuming, it can take 60 to 90 days from the first contact until the check is issued. The use of an experienced broker can facilitate the process and help the viator receive better and faster results.

Are There Drawbacks To Using Viatical Settlements?

Generally speaking, the proceeds of an insurance death benefit are not taxable to the beneficiary upon the death of the insured; however, if the viator receives a percentage of the face value before death, the award may be taxable to the extent that the amount received exceeds the amount of premiums paid; however, since Congress has passed a new law making the proceeds of viatical settlements non-taxable, the transactions are much more attractive to some. Even so, a current tax opinion is suggested.

It is estimated that somewhere between 20 and 30 percent of viatical applicants are eligible for or need to apply for SSI, Medicaid, or both. These are "needs based" programs. Since a viatical settlement may well void the eligibility for these programs, it is important to examine the impact of viatical settlements on resource and transfer of assets provisions of federal needs-based programs. Accepting a viatical settlement can lead to ineligibility for AFDC, emergency assistance, or long-term care under Medicaid if the settlement is received within 36 months of the date on which the application for Medicaid is made or the date on which the insured enters a long-term care facility.

Terminally ill applicants who are not receiving needs based programs -- for example, those who meet Social Security disability standards -- may be interested in viatical settlements as a means of getting high-cost medical care which may be otherwise unavailable.

Several factors should be considered in making the decision to viaticate a policy:

1. This is a new use of life insurance. An accelerated benefit or a viatical settlement will diminish or terminate the post-death benefit for policy beneficiaries. Careful consideration should be given to the purposes for which the insurance was originally purchased, and these should be weighed against current needs.

2. Tax implications are very important. Although proceeds paid to a beneficiary of a life insurance policy are generally exempt from federal income tax, the Internal Revenue Service has not yet ruled on the tax status of accelerated benefits at the time of this writing. Bills are pending in Congress that would make such payments from both insurance companies and viatical settlement companies tax free – but they have not yet been passed or signed into law.

3. Viatical settlements can result in the loss or delay of Medicaid and other needs based programs.

What Do You Do? How Do You Choose a Viatical Settlement Company?

Viatical settlements are a new, yet sensible and human response to some of the very real needs of the terminally ill. At present, only a few states have passed laws that regulate the industry. Experience and track record are certainly major issues in choosing a viatical settlement company.

Often the proceeds of life insurance are more important during the remaining life of a terminally ill person. It can mean the removal of the frustration of having no cash which can, in turn, stress that damages the immune system. It can mean saving your home, an opportunity for a memorable trip, continuing your health care at the highest levels. It can mean retaining independence and dignity by being financially able to select and pay for available choices. When individual circumstances validate this choice, a viatical settlement may be a patient's best hope.

But since this is a very personal transaction, you must look for a company with the sensitivity and compassion to assist the terminally ill person through the process, a process that allows a terminally ill person to turn a non-cash asset into cash when it is most needed.

A good beginning in investigating the feasibility of a viatical settlement is a frank discussion with your primary care physician about your life expectancy. You may want to brief your doctor about the nature of the transaction so he or she will be prepared to furnish your records and any information required along with a statement of your mental competence.

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Today, more than 36 million Americans are age 65 or over. There are more than 22 million family-member caregivers. Then there are the Baby Boomers. All are grappling with the major decisions that accompany the latter stages of life. This book is for them. Written by two experts with decades of experience between them, it is a comprehensive guide that instructs readers about how to create a plan to deal with all aspects of aging, helps maximize options and ensure wishes are carried out.

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