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Benefits
& Insurance
Viatical Settlements
Table of Contents
Basics of Viatical
Settlements
Although the concept of investors making
money from someone's shortened life span is unusual, and even uncomfortable
for some, "viatical settlements," the purchase of the life insurance policies
of persons with life threatening illnesses, can be an important source
of
cash for many people. However, since a life insurance policy can only be
sold once, it is important that it be sold for the highest possible price.
To do
that you must know something about the process.
These companies, which include investment
companies and brokers, pay a discounted price to the insured for the right
to take over the ownership of the policy through assignment and name themselves
beneficiary. Because their profits are made when they collect the death
benefits, almost all types of life insurance policies are eligible for these
sales: whole life, term, universal and even group life insurance from an
employer, as long as the policy allows for assignment of the policy to the
viatical settlement company.
The amount the viatical settlement
companies will pay is based on the length of time between the sale and
the payment of the benefits, i.e., how much longer the insured is expected
to
live. It could be 50 to 60 percent of the face amount of the policy for
a two-year life expectancy, but could be substantially higher or lower
if
the
insured's
life expectancy is shorter or longer, respectively. Companies also pay
a lower percentage if the policy is small, such as $10,000. The amount
paid
is based on a review of the policy and the medical records of the person
insured. The most important factor in determining the amount to be paid
is the life expectancy of the insured, the longer it is, the smaller the
offer. The payout will fluctuate, dropping as more and better medical
treatments
are introduced, rising as competition heats up.
The process usually takes six
to eight weeks to complete and involves several steps. First, you need
to complete some paperwork which gives the details of your insurance and
your healthcare providers. You also sign forms giving the proposed buyer
permission to contact the insurance company to confirm the status and type
of the life insurance policy, and will obtain your complete medical record
from your physician for review by the company's medical consultants.
Based on the medical information
and the policy data, the company will make you an offer, indicating how
much they are willing to pay for the policy. Once the offer is accepted,
the final papers are signed which includes the purchase agreement, closing
documents and assignment of ownership of the life policy. Once those papers
are processed and the insurance company has recorded the transfer, the money
is released to you. Many companies will set the money aside in an escrow
account as proof of their ability to purchase the policy while this is being
transacted.
Most companies also provide a 10
to 15 day grace period after releasing the money during which time you can
return the money and cancel the sale should you have a change of heart about
selling the life policy. Companies licensed in California must give a
15 day grace period.
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Becoming An
Educated Seller
Listed below are several steps which
will help you be a more educated seller and receive top dollar for your policy:
- Policies must be over two years
old. Companies are not interested in purchasing policies whose contestability
period has not expired. Also, an attempt to sell a policy during the first
two years could trigger an investigation that might lead to losing the policy
entirely should there be any misstatements or "misrepresentations"
on the original application.
- It should be also noted that some viatical
settlement companies are starting to screen for policies that were obtained
"fraudulently", i.e. coverage was obtained by consciously withholding
or hiding medical information when applying. Since some policies can be
voided by the insurance companies because of "fraud" even after
the contestability period has expired, some viatical settlement companies
try to avoid purchasing policies which they feel may be in danger of rescission.
- Ask your insurance company first.
Many companies have Accelerated Benefits Programs that will advance
you some of the life proceeds and still pay the remainder of the proceeds
to your named beneficiary at death. They typically only offer these benefits
to persons with a life expectancy of less than twelve or even six months,
however, if you qualify it may offer the best solution to your immediate
financial needs.
- MOST IMPORTANT!! Obtain at least
two or three bids from different companies or brokers. Let all bidders
know that they are being bid against so they won't be tempted to keep their
offer low. The only way you will know that you are selling your policy for
top dollar is to let the marketplace set the price through good, old American
competition. Bargaining between competing offers can raise the offering
price as much as 10%, sometimes more.
First, call several companies
and review your situation with them. Do NOT consider any estimated
bids by phone as accurate. Until they know your medical history and see
the details of your insurance policy, they can't quote a definite price.
And do not let them talk you out of obtaining other bids.
Those that are interested in bidding
for your policy will send you the paperwork to complete. It is not easy
to complete a lot of forms, especially if you don't feel well, but that
is the only way to be sure you are selling your policy for top dollar.
Some people simply photocopy one set of forms and send them to several
companies. While that may work in the preliminary stages of the bid process,
it can also slow down the process as they will all require their own authorizations
and releases.
Many brokers will tell you that
they will bid multiple companies with just one set of papers. If you choose
this route, require the broker to submit to you in writing the
name of every single company they submitted your policy to and the amount
of each bid received. There are some brokers who may recommend the company
that pays them the highest fee rather than you the highest price.
Don't overdo the number of bids
because your physician will have to provide each with a set of your medical
records. Also, make sure you tell your physician how many companies you
are applying with. They will often find it easier to make several copies
of your medical records all at once rather than one at a time.
- It is more difficult to find
buyers for small life insurance policies. Many companies do not buy
policies if the face amount is less than $25,000. To sell one of these smaller
policies, it may be necessary to call many more companies to get offers
on them. For policies of $5,000 or $10,000, it may be simpler to negotiate
a sale with a friend or relative provided you have some that have the cash
to do it.
- Use only California licensed
viatical settlement companies. The California Department of Insurance
regulates companies and issues licenses to operate in California. Make
sure the companies are either licensed or they have completed the paperwork
and
paid the fees to apply for a license. APLA's Benefits & Insurance Program
maintains a list of those companies that is regularly updated. The list
includes
both
funding sources, i.e. companies that have direct access to money to purchase
policies, and brokers, companies or individuals who will shop your policy
in the investment marketplace to find funding. Although, it would seem
that funding sources should be able to purchase the policies much more
rapidly,
it does not always work out that way. In selecting what companies to obtain
offers from, you may wish to choose a mix of brokers and funding sources.
And using a California licensed company is necessary to qualify for the
federal income tax exemption on the sale (See #12 below).
- Consider selling only part of
a policy. Many companies will purchase part of a policy, leaving you
in control of the remainder. This way, there can still be some benefit to
your beneficiaries, or you can sell the remainder at a later date, possibly
for a higher percentage. Make sure that you retain control over the remainder
that is unsold; watch out for language in the sales contract that might
lock in the remainder in some manner.
- Beneficiaries must approve of
the sale of a policy. To avoid future court fights with the beneficiaries
of a policy, companies require them to sign documents approving of the sale
and promising not to contest it. If you think your current beneficiaries
may not sign, you may wish to change beneficiaries before selling the policy.
- Make sure all bids are NET
offers. Some companies will offer a price then subtract "costs,"
legal fees, future premiums and "handling expenses" from that
figure. To compare "apples to apples" ask the bidder for the "net
price". In other words, how much money would you actually receive?
- Do NOT accept partial or installment
payments. Take your money in one lump sum amount. If you accept a partial
payment and there are problems with future payments, it will be nearly impossible
to void the sale and start over. A possible exception to this might be if
the company is willing to put the entire amount into a trust or escrow account
for later distribution in installments and there is a special reason not
to accept the full amount at once.
- Do not hesitate to set limits.
If the sale is taking longer than promised or if there are other problems,
don't forget that you are the customer and there are other buyers. Agree
to a time table with the buyer and if it is not met, stop the process and
find another buyer.
- Do not be afraid to bargain
for a higher selling price. Many companies will raise their offer if
they know that competition is offering a higher amount. If you are so inclined,
some bargaining back and forth among the bidders can often drive the price
even higher.
- Know the tax implications.
Proceeds of such sales are not generally taxable by the State of California.
Additionally, the Health Care Portability and Accountability Act of 1996
exempts proceeds of a sale from federal income tax if they are received
after December 31, 1996 provided two criteria are met: (1) The person selling
the policy is "certified by a physician" as having a life expectancy
of 24 months or less; and (2) the company buying the policy is licensed
in the state where the sale occurs, if that state requires licenses (In
California, it must be with a California licensed company). You are urged
to contact a tax counselor for tax advice. For a list of companies licensed
in California, click
here.
At the filing of your income taxes for
that year, you will receive a 1099LTC from the viatical company which
is what they use to notify the IRS of the transaction. You should, when
filing your taxes, include Form 8853 - Medical Savings Accounts and
Long-Term Care Insurance Contracts.
Don't wait for a tax audit
to accumulate the documentation! At the time of the viatical sale,
obtain a copy of their California License from the viatical company. Also
get your doctor, or any doctor, to provide you with a letter stating your
life expectancy is twenty-four months or less. Hold these documents in
your tax files in case you are audited by the IRS.
- Know the impact on on your benefits.
Receiving a large sum of money will usually cause a person to lose SSI benefits
and Medi-Cal (Medicaid) as well as other welfare or needs-based programs.
However, it will have no impact on benefits from Social Security (SSDI),
State Disability (SDI), Medicare, employer provided Long Term Disability
plans or private disability plans.
- Don't sell your policy until
you need the money. Rather than sell the policy for a lower amount and
invest the proceeds, leaving the life policy unsold until the money is needed
will probably earn you more in increased value than any investment would
bring.
- Explore other sources of money
first. Selling a life insurance policy can be expensive when counting
the discount taken from the face amount and adding any tax liabilities.
Make sure that other sources such as retirement funds and sales of other
assets are explored first.
- Ask for help if you need it.
If you need assistance, do not hesitate to ask for it from an attorney,
tax counselor, benefits consultant, case manager, or other knowledgeable
person. It may cost some money, but it will be worth it in the long run.
This is especially true if you are receiving several thousand dollars and
do not have experience in investing sums of that amount. In such a case,
a fee-for-service financial counselor will be well worth the money.
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