What is it? Life insurance policy have several options to address

1. What is it? • Life insurance policy have several options to address • Increase medical expenses associated with • Terminal illness such as cancer or aids • Chronically debilitating illnesses • Viatical settlements with independent third parties • Accelerated death benefit payments from the insurance companies issuing the policies • Viatical settlements • Third party purchases the life insurance policy of the insured (the viator) • The insured receives a one time payment usually between 50% to 80% of the policies face value • The purchaser then becomes the owner and beneficiary of the policy • They receive the proceeds when the insured dies

2. What is it? (cont'd) • Viatical settlements (cont'd) • Most purchasers require the insured to have a life expectancy of two years or less • Accelerated death benefits • Provision that require the insurers to prepay a portions of the death benefit to the insured • Insured has a disabling or life threatening condition • Doctor predict that will cause death within a relatively short period of time • Other names for this option • Accelerated death benefits • Living needs benefit • Acceleration-of-life-insurance benefit • Living payout option

3. When the use of such a device indicated? • When a person is terminally ill or chronically ill • Person is in need of cash • Other options to meet those cash needs are not available • Advantages • Payments received income tax free • Proceeds can be used for any purpose desired • Out of pocket medical expenses • Finance alternative medical treatments not covered by existing medical coverage • Finance dream vacation or purchase car • Personally distribute cash to loved ones • Pay off loans • Maintain dignity by not dying destitute

4. Disadvantages • Reduced total payout • Accepting accelerated death benefit reduces benefits payable to the beneficiaries • Eligibility for government assistance programs • Creditors may be able to reach proceeds paid to a living insured • Policy containing this provision should not be considered a replacement for health insurance or long term care insurance • It is possible for dishonest persons to take advantage of a terminally ill or chronically ill person who receives a large sum of money • Insured may be venerable to charlatans claiming they can cure the ailment or scam artists who promise large returns on the insured newly gained wealth

5. What are the requirements? • Terminally ill • Certified by a physician • Illness or physical condition that can be reasonable expected to result in death in less than 24 months • Chronically ill • Certified by a licensed health care practitioner • Unable to perform at least 2 activities of daily living (eating, toileting, bathing, dressing, transferring and continence) • Having a level of disability to the level of disability as described above • Requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment • A person cannot be both chronically ill and terminally ill

6. Types of life insurance policies • Not all policies qualify for preferred treatment under accelerated benefits • Policy must meet the definition of life insurance under IRC 7702 • Cash Value Accumulation Test (CVAT) or • Guideline Premium / Cash Value Corridor test (GPT) • Accelerated payments made to someone other than the taxpayer under a key person and other business policies are not protected • Limitations on payments to Chronically ill individuals • Must be reimbursements for the costs of qualified long term care services • Unlike terminally ill insured’s, they do not have the discretion to use benefits in whatever manner they desire

7. Limitations on payments to Chronically ill individuals • Must be reimbursements for the costs of qualified long term care services • Unlike terminally ill insured’s, they do not have the discretion to use benefits in whatever manner they desire • To qualify for favorable tax treatment • Contract may not reimburse expenses incurred that are reimbursable under Title XVIII of the social security act (Medicare) • Additional rules • IRC limits the exclusion for payments to chronically ill persons to $270 per day (2008) which equals $98,820 per year (in 2008)

8. Additional rules (cont'd) • Viatical Settlements • Payments must be made by a Viatical Settlement Provider • Provider must be licensed to provide Viatical Settlements under the laws of the state in which the insured resides • Provider must meet the requirements • Sections 8 an 9 of the Viatical Settlements Modal Act • Model Regulations of the National Association of Insurance Commissioners • Selecting the best policy • First investigate prospective insurers • Good track record • Solvency rating • Eligibility requirements • How will the accelerated payments affect the policies overall death benefit?

9. Selecting the best policy • First investigate prospective insurers • Good track record • Solvency rating • Eligibility requirements • How will the accelerated payments affect the policies overall death benefit? • Insurance companies vary as to which illnesses will trigger the payment of the benefit • Some use any type of terminal illness • Others restrict benefits to specific types of deceases • Examples - Aids, heart attack, stroke, renal failure, Alzheimer's, liver transplant • Some companies restrict availability to those with less than 12 months to live

10. Selecting the best policy (cont'd) • Amount payable varies to between 2% and 95% of the death benefits • Payments received • One lump sum or • Regular installments or • Installments based on the insured’s expenses • Other issues • Can the benefits be stopped before all installments received • Leave more death proceeds to the beneficiaries • What happens if the benefit installments cease before the insured dies • Carriers may restrict the use of benefits received • They can only be used on medical care

11. Selecting the best policy (cont'd) • Other issues (cont'd) • What options are available if the insured dies before receiving all the installments • Are remaining payments forfeited • Will the payments continue on to the beneficiary • Will the beneficiary receive a death benefit adjusted for the accelerated payments • General rule • Accelerated death benefits pay a higher amount than do Viatical Settlements, but typically impose a greater number of restrictions on medical conditions

12. Tax Implications • HIPAA (1996) • Included an express provision excluding payments from Viatical Settlements and Accelerated death benefits from gross income • Requirements to escape taxation • Terminally ill • Certified by a physician • Illness or physical condition that can be reasonable expected to result in death in less than 24 months • Not included within the class of people who qualify as chronically ill

13. Tax Implications • Requirements to escape taxation (cont'd) • Chronically ill • Certified by a licensed health care practitioner • Unable to perform at least 2 activities of daily living (eating, toileting, bathing, dressing, transferring and continence) • Having a level of disability to the level of disability as described above • Requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment • Exclusion only applies if payments are made for costs incurred by the payee for qualified long term care services • Must not be a payment or reimbursement for expenses reimbursable under Medicare

14. Tax Implications • Transfer For Value Rule • IRC 101(a)(2) • In the case of transfer for valuable consideration, by assignment or otherwise, of a life insurance contract or any interest therein, the amount excluded from gross income . . . . shall not exceed an amount equal to the sum of the actual value of such consideration and the premiums and other amounts subsequently paid by the transferee • Virtually all transfers to a Viatical Settlement Company fall within the transfer for value rule • The death benefit the Viatical Settlement Company receives will be taxable income to them, to the extent the proceeds exceed what they paid for the policy plus any subsequent premiums • Exceptions to the transfer for value rule • To the insured • To the partner of the insured • To a partnership in which the insured is a partner • To a corporation in which the insured is a shareholder or officer

15. Ethics • Planners need to protect the client who may be contemplating entering into a Viatical Settlement or filing for accelerated death benefits • Use a reputable Viatical Settlement broker • Broker’s generally charge 3% to 6% of the payout • Provider must be licensed in the state the insured resided • Ask the insured what public assistance, if any they are receiving • Viatical Settlements could cause those benefits to be lost • Receive written assurance that all medical records of the insured will remain confidentially and will not be shared without the insured's written permission

16. Alternatives • Borrow against cash values • Advantages • Policy will pay the full death benefit less any loans taken • Policyholder will not have to repay the loan while living • Loan proceeds will generally be free of income tax (if the policy is properly structured) • Disadvantages • Amount borrowed less than what could be received from an accelerated death benefit or Viatical settlement • Surrender the policy • Surrender value less than death benefit • Amounts received in excess of basis are taxable

17. Alternatives • Borrow from a third party • Friends, family members, possible the beneficiary • Receive repayment from the insurance policy • Securing the loan • Lender with an unsecured note run the risk that other claimants have a higher priority and therefore there may be insufficient assets to repay the note • Note should be secured with specific collateral • Using the policy as collateral • May trigger the transfer for value rule • Consider transactions using the exceptions to the transfer for value rule • Partners of the insured, partnerships of which the insured is a partner etc