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Hidden Pots of Gold

By Per Larson

July 2000

The market for the sale of life insurance -- viatication -- has taken a nosedive in 2000. Yet an almost totally ignored way to get cash out of life insurance, at almost no cost, remains: accelerating the payout of life insurance directly with the insurer.

This option, which exists on many group and individual life policies, was introduced in the '90s. Applying is simple: Call the insurance company's claims department, ask for a form, have the doctor sign it, and send it in. If the application is approved, the insurer will usually pay out up to 50 percent of the policy, while the remaining half will remain in force, to be sold later or kept as insurance.


Viatical Dead End

The viatical market is suffering major reverses. Highly publicized incidents of viatical companies accused of bilking investors have sent investors running. Florida, for example, has recently seen the indictment of companies, brokers, and sellers for getting and selling life insurance illegally. In addition, stock market fluctuations are keeping investors on the fence. In 2000 a wave of huge investments dedicated to the purchase of life insurance from sick seniors has drawn money and attention away from viatical settlement to a new product, life settlement. New York now has barely three licensed buyers left. Most licensed buyers will not bid these days on people with T-cell counts higher than 300. And even when they are willing to bid, their offers are extremely low.

There is some activity among unlicensed companies, but dealing with them makes the proceeds taxable income for New Yorkers or residents of any other state that licenses viatical companies.


Unheralded benefits

Most people get at least some of their life insurance through their jobs. The benefits booklets that employers give out describing group life benefits should include at least a paragraph at the back about accelerated benefits if they are available. But these benefits are new, so it's often best to go straight to the insurer's claims department to inquire about making this kind of claim.


E-Z Claims

Accelerated benefit claims are relatively rare, and perhaps for this reason are relatively easy to get approved. It at least appears that many insurers check only to see if a simple one-page form has been filled out completely and if an M.D. has checked the box stating the required life expectancy. Typically a maximum twelve-month life expectancy is required to qualify for accelerated benefits. Sometimes, for federal life insurance for example, the maximum is nine months, and in rare cases it is as little as six months. Few insurers ask for medical records, and there are relatively few delays in processing the claims.

Once your claim is approved, the insurer should give a written summary explaining how much you will receive and how the figure was arrived at. In addition to the amount to be paid, it should show the deduction for interest on the use of the money, usually for half of the life expectancy period, perhaps a small processing fee, and how much insurance remains. If you are a New York resident, your insurer is required to let you ponder the offer for two weeks . . . but many of them seem to ignore this.

Once the deal is struck, a certified check is usually sent overnight. The whole process may take less than one month, and rarely more than two.


Chronic Care Financial Aid

Many insurers will accelerate life insurance benefits if an M.D. certifies the need for nursing or home health help in activities of daily living. ADLs, as they are known, include such everyday necessities as eating, toileting, bathing, and dressing. As with certifications of life expectancy, sometimes the insurer will have a form; otherwise a physician's letter is enough. The money for this purpose is usually paid out quarterly.

A potentially important aspect of this is that if you are receiving chronic care financial aid, you are allowed to pay a nonlicensed home care provider, such as a lover, friend, or family member, to provide the help you need. The only difference is that if you are using a licensed caregiver, the amount you pay up to $73,000 per year is tax-free, while the amount you pay an unlicensed caregiver may be taxable. See IRS Form 8853 at www.irs.gov, especially line 24 and page 6 of the instructions.


Advantages

The big financial advantage is that there is no viatical discounting; viatical offers are in the basement these days, about 30 to 60 percent of the face value of the policy. Then there's speed; viatical processing can take two to three months, especially in these days of indictments. And accelerated benefits are tax-free, since life expectancy is certified to be less than the two-year maximum mandated by the IRS.

But the biggest advantage is that this amounts to a nothing-ventured/nothing-gained proposition. The application process is minimal, and most applications appear not to ask for test results, diagnoses, or symptoms -- just an M.D.'s signature.


Finding Accelerated Benefits

These new benefits may not exist on old policies. Many insurers, however, add them to old policies, but tell policyholders about them only via envelope stuffers that look a lot like junk mail advertisements.

It's often difficult even to find out if these benefits exist in a particular instance because many confusing euphemistic names are used to describe them. They are called "ADBs" (for Accelerated Death Benefits), "living needs benefits," and "living benefits."

Only a few insurers advertise the existence of these new benefits. Agents may be motivated to sell, but may not keep current on policy changes.

Finding who at the insurance company can give you an informed answer can be a challenge. Accelerated benefits may not be a topic that fits into the pat answers most customer service departments are programmed to give. Examples abound where people have been told that accelerated benefits don't exist, only to discover on the third or fourth inquiry that yes, they do. The public relations department or president's office should know--especially if the insurer is about to add this feature to policies.

Likewise, most benefits people in human resources departments have never processed a claim like this. Benefits booklets and memos are notoriously out of date, unpublicized, poorly distributed, and largely unread. Go directly to the insurer for accuracy and for confidentiality.


Creating Accelerated Benefits

I've encountered several situations where the option of accelerated benefits didn't exist initially but the insurer decided to institute it retroactively. I've also worked with employers and professional associations to add these benefits as a rider to existing coverage--usually at no added cost, especially when I point out that this is an "in-house alternative" to viatical settlement.

If you find that no accelerated benefits exist in your group coverage, whether at an employer or in a professional association, this is a golden opportunity to do well by doing good. As a financial activist, point out to management that accelerated benefits help employees at a time when they need cash the most--and that adding such benefits usually doesn't cost one penny extra. Groups like to provide new benefits for their members, especially if they help members in crisis--and most especially if they can do so at no cost to themselves. The group life market is highly competitive, and groups will have no difficulty finding group life coverage that offers an accelerated benefits option for their members.


Understanding Accelerated Benefits

Life insurers developed acceleration as a response to viatication. Insurers don't like viatication. For one thing, viatical companies keep policies current, whereas most policyholders let their policies lapse after an average of seven years.

Not all insurers offer acceleration. Most big insurers do, but most smaller companies do not. Virtually no insurers, big or small, offer it on policies converted from group to individual life coverage. Because acceleration has been an afterthought, a countermeasure, these benefits have been the subject of little industry consistency and coordination.

Every insurer handles acceleration differently. Maximum life expectancy may be six, nine, or twelve months. The insurer may allow acceleration of 25 percent, 50 percent, or maybe even 100 percent of the policy value--or may put a cap on the dollar amount that can be accelerated. Usually acceleration is allowed only once, not in stages.

Until 1997, half of all insurers structured acceleration as a loan against the remaining value of the policy, accruing interest that reduced the value of this remainder. Beware! That was done before federal law made all this tax-free and is an unnecessary drain now.

Many insurers do not allow acceleration on policies worth less than $25,000--not even Prudential, which otherwise publicizes its pioneering efforts.


The M.D.'s Signature

The insurer may not require that the M.D. signing the form be your attending physician. Many M.D.s refuse to sign life-expectancy statements on the grounds that such statements send the wrong signal to patients ("a prescription for death") or out of fear of incurring liability. The statements, however, are medical opinions, not predictions; much assurance and explanation may be required. If your physician won't sign, you have the right to go to another doctor who will.


Sequencing Acceleration and Viatication

If you have an acceleration option and possibly might qualify, it's extremely important to accelerate before viaticating. Sometimes the option to accelerate is nullified if the policy has been assigned to a viatical company, or if the viatical company ends up owning the right to accelerate. Usually viatication is possible after acceleration, but some antiviatical insurers structure acceleration so that the remainder cannot be assigned, making viatication either extremely difficult or impossible after an acceleration.


Getting Help

You may need the help of an experienced professional, not just in finding out if accelerated benefits exist in your life insurance policies and what criteria are used, but in how claims will be processed. The advisor may also help you make the decision and help your physician understand the process. He or she should advise you on the impact the settlement will have on your taxes and other personal financial issues.

Make sure the person helping you has direct experience with accelerated benefits. Your advisor should have no financial incentive--such as a high, hidden brokerage commission--to steer you to viatical settlement or to highly commissioned investments.

If there is a problem, remember that acceleration is always regulated by the state insurance department. Finding specialized legal help in that department can be very difficult, however, since this business of accelerated benefits is a new phenomenon.


You Cannot Be Forced

New York law protects consumers from being forced by creditors to accelerate or sell life insurance to pay debts. Medical assistance and nursing homes must permit patients to keep their life insurance and cannot force them to accelerate.

But . . . the nursing home industry has a scam to coerce people into accelerating. First, the home claims to have no "Medicaid beds" then it pressures friends and family into accelerating the life insurance to pay for a "private bed." In truth, there are no quotas or rationing of beds. Life insurance is and should be the one last asset that you can pass on to loved ones, and no one should be stripped of it by greedy healthcare providers.


To Accelerate or Not

After all the technical problems are solved, the decision remains: Is acceleration wise? If you need the funds now, and if you believe that you will beat the written life-expectancy estimate, it may very well be. The funds are tax-free; applying for them requires little effort and no immediate commitment; the funds obtained may do a great deal of good, or may multiply through prudent investment until they're needed. The sheer existence of ample funds can help fight serious illness by expanding the treatment options open to you.

If your estate is large enough to be taxed by the state and the federal government, get some estate planning advice before you act. The payout may have a major impact on your estate taxes.

If your life expectancy truly is in the single digits--nine months or less--you may not want or need the funds as much.

These funds can also jeopardize any public benefits you may be receiving. When you accelerate, a 1099LTC form is issued to the IRS by the insurer. Although the funds you get are tax-free, they must be reported to Medicaid, DAS, ADAP, AHIP, or any needs-/welfare-based program. If they are not reported and the program then discovers them, huge problems can result. Receiving a large amount of money from an inheritance, acceleration, or viatication can make you ineligible for many public programs. Seek advice from a qualified social worker. Beware of advice to give the money away, though, because those who supposedly hold it for you may change their minds, die, get sued, or become incompetent, thereby tying up your funds. There are legal ways to avoid this, such as changing the ownership of the policy to someone you trust, who can then accelerate or viaticate it. Even a Medicaid trust may not be possible.


Caveats: Bear in mind that the focus here is a very specialized but important technique that should be considered in the overall context of good financial planning tailored to your special needs as someone with HIV. This is not a balanced treatment of viatication or general issues; visit the author's website at www.gaymoney.com for nearly 100 articles on that.

Also, the advice given here is limited by the space available. It is general, background information. Check your own policies and written descriptions of your own benefits. If you work with other people, take into account their experience. Your job and their job is to tailor this information and advice to your circumstances. And remember: This ballpark advice doesn't give you aisle and seat numbers!


Per Larson gives financial advice to people with HIV and other serious illnesses, helping people go out on disability and return to work. He represents sellers in obtaining competitive bids in viatication and advises people on accelerations. He works with individuals and conducts workshops for Memorial Sloan Kettering and Friends In Deed and helped give the Body Positive workshops on Personal Finances and HIV for several years. A regular contributor to Body Positive, Positively Aware, and POZ--including over a dozen articles on viatication and acceleration issues--he is the author of Gay Money and over 100 other articles. He has discussed viatication and acceleration on 60 Minutes and 20/20 and has been quoted or featured in Forbes, Kiplinger, and Worth as well as the Washington Post, Boston Globe, and New York Times. Per Larson can be reached at PerLarson@aol.com or (212) 734-0941.


RESOURCES

The following articles on acceleration and viatication have been written by the author:

"A No-Questions-Asked FEGLI Life Insurance Opportunity" (Positively Aware, Spring 1999)

"Viatical Settlement as a Market: New Methods Rewrite Viatical Book" (GFN.COM, June 1998)

"Money for Your Life" (Positively Aware, July/August 1997)

"Viatication: Rewriting the Rule Book" (Positively Aware, May/June 1997)

"Viatical Settlements: Update on Changes" (Victory Update, February 1997)

"Changes Upending the Viatical Market in New York" (LGNY, January 20, 1997)

"Viatical Chaos" (In The LIFE, January 1997)

"Panic on AIDS Street" (In the LIFE, August 1996)

"Viaticating Life Benefits" (Case Review, Summer 1996)

"Was that buy low, sell high, or. . . ?: Viatical Settlements" (Positively Aware, July/August 1995)

"Living Benefits from Life Insurance" (Victory! January/February 1995)

"Cashing in Life Insurance Can Be Rewarding--And Risky" (privately published, 1994)

"Getting Cash Out of Life Insurance . . . Safely" (privately published, 1993)


Back to the July 2000 Issue of Body Positive Magazine.




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