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Cashing Out Life Insurance


Creators Syndicate

FIGHT BACK! BY DAVID HOROWITZ

Cashing Out Life Insurance

People suffering terminal illnesses are often at the end of
their financial resources. So they turn to the one sizable asset they
have left -- their life insurance. If they can tap the cash value of
their policies, they can settle their debts and make their remaining
time more comfortable.
The process is called a viatical settlement. The policy holder
names an investor as beneficiary of the policy. In return, the
investor puts up a portion of the face value of the policy -- in cash.
The investor then collects the entire insurance benefit when the
policy-holder dies.
All types of life insurance can be brokered -- term policies,
whole life, universal and group coverage. Brokers bring investors and
sellers together and handle the paperwork. The whole process usually
takes six to eight weeks.
How much the policy-holder receives may vary from 50 percent
to 80 percent, depending on the size of the policy and the
policy-holder's life expectancy. The greater the face value of the
policy, the larger the percentage the policy- holder receives in cash.
On the other hand, the longer the person's life expectancy, the longer
the investor must wait to recoup those funds, which reduces the cash
payout to the seller.
Basic guidelines for a viatical settlement are that the seller
must have two years or less to live, and the policy must have been in
force for at least two years. That's supposed to keep people from
buying huge policies just so they can turn them around for cash.
There are no set formulas for determining settlement values.
Different brokers may offer different cash payouts on the same policy.
People wanting to sell their coverage should get competing bids on
their policies.
By its very nature, this whole business is sensitive and
somewhat controversial. One state insurance commissioner described it
recently as "profiteering on the terminally ill" and "contrary to the
public interest." There are serious concerns that brokers are often
unlicensed and unregulated and may not disclose the full consequences
of a viatical settlement to the sellers -- income taxes, for example.
Unlike a loan or life insurance benefit, the proceeds from
selling a policy are considered taxable income. But there are tax-free
alternatives to selling a policy outright. Most insurance companies
allow policy-holders to borrow against the value of their policies
without signing away all their benefits. Such loans usually require
annual interest payments. But they are not taxable and are paid off
when the person dies.
Many carriers also offer special accelerated benefits payments
to terminally ill policy-holders. Each carrier has different
guidelines for this service. Typically, it is available only to those
with less than a year to live. But again, these cash payments are not
considered taxable income.
If you are thinking about a viatical settlement, consider the
alternatives. Talk to your own insurance agent. Find out what kind of
settlement your carrier offers to terminally ill policy-holders. Get
at least three competing bids from viatical settlement brokers. And if
your state licenses settlement brokers, be sure you deal only with a
licensed company.
If you have any questions or comments, please write to David
Horowitz in the Consumer Forum+ (go FIGHTBACK). COPYRIGHT 1994 CREATORS
SYNDICATE, INC.


 
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