Selling Your Life Insurance in Today's Market
An ancient Chinese proverb warns "May you never be so cursed as to live in interesting times." When it comes to the viatical industry (the companies that buy your life insurance policies), and indeed the AIDS epidemic itself, these are surely interesting times. Notwithstanding the media hype, the AIDS crisis is by no means over, but truly amazing things are happening with the availability of viral load tests, protease inhibitors, and other treatment advances. As never before, people living with the virus have hope that they may yet live out their natural lifetimes.
Understandably, the situation has wreaked havoc in the viatical industry. Think about it: the people buying your policy are making the deal, figuring out their offers, etc., based upon their best estimate as to your life expectancy. That question has become almost impossible to figure out. Will the effectiveness of the protease inhibitors last? Will other treatments on the horizon completely disable, or even eliminate from the body, the virus? Will that tricky virus once again gain the upper hand? No one knows the answer to such questions.
Here's the good news: the prevailing uncertainty about HIV has not yet undone the viatical industry. Although a handful of prominent companies have stopped investing in policies held by people with HIV, the majority are still very much in the market. For people above approximately 300 T-cells (arbitrary though that number may be), it has become extremely difficult, although sometimes possible, to viaticate. Some companies will purchase such policies, but the offers have for the first time began to fall below 50% as a matter of course. A stronger market still exists for people with lower numbers, or especially a history of opportunistic infections, but even the offers being made to them have begun to decline. The days of the strong seller's market, at least for the time being, seem to be history.
Before You Leap
It has never been more important, therefore, to do your best to understand the market before you proceed with a viatication. As your first step, always ascertain whether or not an accelerated benefits option may be available to you from your insurer. If so, that may be a much better deal for you. In contrast with viatical settlements, involving the purchase of your policy from third-party, viatical settlement companies, accelerated benefits involve payment to you by the company issuing your policy, your insurer. Even if your insurer does offer such a benefit, you may not qualify, because typically an extremely short life expectancy (one year, six months, or less) is required. If you do qualify, however, and your doctor will back you up with an opinion letter confirming the life expectancy, you stand to get a much better deal through accelerated benefits. Recently, I have helped clients in accessing accelerated benefits in the range of 90 to 92 percent, when they would have gotten substantially less from viatical settlement companies. As an added bonus, the proceeds of accelerated benefits transactions are now always exempted from federal taxability.
If accelerated benefits are not available to you, and you find viatication to be your only option, competitive bidding with the right companies is still your best bet to shake those "low offer blues" away and to get top dollar. But that's only one part of the picture. As of January 1, 1997, you also need to be aware of the new federal law affecting the taxability of viatical proceeds in order to protect yourself. Let's take a look at what you cannot afford not to know about the new law.
A Two-Step Process
The new law is not complicated in the way it works. In a nutshell, viatical proceeds received by a terminally ill viator are tax-exempt if the deal is done with a qualified viatical settlement provider. If either of those elements are absent, the proceeds will be federally taxable as income. Compliance with the law is extremely important, because it is widely anticipated that regulations will soon be put in force requiring viatical companies to report payment of money to viators, through 1099's or otherwise. Such a requirement will probably be retroactive to the effective date of the new law, January 1, 1997, thus dramatically increasing the probability of an IRS audit in such transactions.
No need to be taken by surprise. Understand that each term above has a specific definition under the law. Terminally ill means that you have "been certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 24 months or less of the date of the certification." Compliance with this provision can be tough; lobbyists involved with the legislation, and its drafters, probably intended to protect a greater number of HIV-positive people and did not foresee the advent of protease inhibitors. Nevertheless, you must obtain this letter for your files in order to ensure that the money you receive will not be subject to taxation.
Second, you must deal with a qualified viatical settlement provider. What does that mean? If you live in a state that has passed laws regulating the viatical industry and requiring licensing (such as, for example, New York, California, Florida or many others), you now must deal with a company that has applied for a license in your state to avoid taxation. Here's the problem: some of the (historically) most competitive bidders in the market may not have taken that action. Please realize that, if that is the case, even a higher offer from such a company may not be competitive if a huge tax bite may be imposed. The good news, and the bad, is that you can no longer safely assume "Oh well, I'll be dead by the time the IRS catches up with me anyway." Think carefully before you let the promise of a higher offer today set you up for a fall tomorrow. You may very well be here to regret it.
First, find out from your state insurance department whether you live in a state requiring licensing. If you do, ask any company you are dealing with whether they have applied for a license, and before you sign a contract verify that information with the state. Don't accept any story or excuse they might come up with. If they haven't applied for licensing, and your state's laws require them to do so, take your business elsewhere. The tax laws leave you no choice.
If Your State Does Not Require Licensing
A growing number of states have passed laws regulating the viatical industry, and requiring licensing. Your state, however, may not be among that number. If that is the case, the law becomes a little more complicated. If no licensing is involved, the law looks to certain of the requirements set forth in model legislation and regulations regarding viatical settlements as promulgated by the National Association of Insurance Commissioners (the NAIC) in an effort to ensure that the company is "on the level."
In order to qualify as a provider under the law, the company must meet the requirements of Sections 8 and 9 of the Viatical Settlements Model Act as promulgated by the NAIC, as well as the standards set forth in Section 4 of the Viatical Settlement Model Regulations, titled "Standards for Evaluation of Reasonable Payments" Since the burden may fall on you to verify the company's status, it is important that you understand exactly what the law is looking for. In a nutshell, the company must make certain written disclosures to you (such as that receiving the funds might result in a loss of means-based benefits, or that there may be alternatives to viatication), and must use certain business practices, such as an independent escrow agent, and provide you with a right of cancellation within a certain time, etc.). For more specific information on these standards, see Chapter 15 of the author's book, HIV Law: A Survival Guide to the Legal System for People Living with HIV, available from Crown Publishers in April, 1997.
Be aware of these simple rules, keep your eyes open, and protect yourself. A viatical sale is an important financial transaction; treat it accordingly!
This article was provided by Paul Hampton Crockett, Esq..