Accessing Life Insurance Policy Benefits Early Through Life Settlements and Viatical Settlements

August 24, 2011 at 7:43 am Leave a comment

Santa Clarita, California-based CaMu Financial & Insurance Services, Inc., offers a wealth of financial, retirement, estate planning, and insurance services. One question that purchasers of life insurance frequently have is whether they can utilize the benefits of their plan while still living. While not automatic, this is certainly possible as an accelerated death benefit (ADB) rider on many plans. An ADB allows the use of up to 50 percent of death benefits in cases of terminal illness, long-term nursing care, and other specified health conditions.

Even without having built the ADB feature into a life insurance plan, there are other ways of accessing early benefits. The two most common strategies are through life settlements and viatical settlements. A life settlement allows the individual to access a one-time cash payment for his or her life insurance policy. The amount offered by a third-party company will be less than the death benefit and more than the policy’s cash value. Between these two guideposts, there is a wide variation of payment amounts. This happens because the life settlement amount offered reflects the current value of the policy, based on estimated life expectancy. The chronically or terminally ill individual will be offered a greater amount for the policy.

There are often tax liabilities on the lump-payment sum, although portions used to pay for long-term health-care needs may be tax-exempt. Life settlements are generally restricted to men age 70 and older, and to women age 74 and older. A viatical settlement involves a similar method of selling the life insurance policy to a third party but is limited to the terminally ill. The phrase “terminally ill” means that an individual has been diagnosed as having less than two years to live. As with life settlements, the amount received depends on life expectancy. The third-party company pays all remaining premiums, plus a one-time lump payment, in return for receiving all death benefits.

A significant difference from life settlements is that the money received from the viatical settlement is tax exempt, except under specific conditions. Viatical settlements are less frequently awarded than life settlements, with less than half of applicants approved. Both types of one-time settlements present the significant drawback of eliminating any death benefit from the policy to heirs. In exploring using life insurance policies prior to death, we recommended consulting with an experienced financial advisor. Accredited by the Better Business Bureau, CaMu Financial offers free initial consultations to clients with questions on how to best manage their financial future. 

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