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Illinois Insurance Facts
November 2002 |
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Illinois Insurance Facts
November 2002 |
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If you are diagnosed with a terminal illness, such as AIDS or a qualified covered condition such as life-threatening cancer, you face many hurdles. You are likely to have medical expenses that insurance won't pay, as well as other bills.Traditionally, life insurance helps surviving beneficiaries meet expenses. Now there are two other options available that let the insured tap into their life insurance benefits while they are still living. These options are Viatical Settlements and Accelerated Death Benefits.
The term viatical comes from the Latin term viaticum which means "provisions for a long journey." If you are terminally ill, a viatical settlement lets you sell a life insurance policy you already have to a viatical settlement provider. The person selling the life insurance policy is the viator. He or she will get a cash payment from the settlement. This person gives up ownership of the policy in return for a cash payment that is less than the full amount of the death benefit in the life insurance policy. Typically, the viator has a terminal illness.
A viatical settlement provider is the person or company that buys the life insurance policy. The viatical settlement provider becomes the policy owner, must pay any premiums that are due, and eventually collects the full amount of the death benefit from the insurance company.
The person or company who represents the seller (viator) and can "comparison shop" for viatical offers is a viatical settlement broker.
A qualified covered condition means a heart attack, stroke, life-threatening cancer, renal failure, Alzheimer's disease, coronary artery surgery, paraplegia, major organ transplantation, or total and permanent disability.
Some life insurance policies have an Accelerated Death Benefits option. The insurance company will pay you a percentage of the policy's face value, minus any outstanding policy loans, if you buy a life insurance policy with this feature.
A viatical settlement or accelerated death benefit option may be a good source of funds. But you should fully understand how your choice will affect you and your survivors. Before you decide to apply for a viatical settlement or accelerated death benefits, you should:
1) Realize that after your death the policy may not pay your beneficiaries any death benefit. Or it may pay a much lower benefit than you planned when you bought the policy.
2) Think about whether other options would be better for you. You might borrow the cash value of your life insurance policy or cancel the policy and take out the cash value.
3) If you owe money, ask your accountant if your creditors can try to collect what you owe them from your life insurance payouts. Recent federal legislation makes payouts from a viatical settlement or accelerated death benefits tax free, a great benefit to terminally ill individuals.
4) You should contact your personal tax advisor as there may be tax implications under certain circumstances on the sale of a life insurance policy; for example, if you are not terminally ill and you sell your life insurance policy to a viatical settlement provider.
5) Decide how payments from your life insurance will affect your eligibility for programs such as Medicaid and supplemental Social Security income.
| Viatical Settlements | Accelerated Death Benefits (ADB) | |
|---|---|---|
| Who is a candidate? | Generally, Viatical Settlement Providers (VSPs) only buy your policy if you have 36 months or less to live. But some may buy policies from people with longer life expectancies. | You are usually eligible if you have 24 months or less to live and you added this option to your life insurance policy before you became terminally ill. |
| How do I find a provider? | Check the list of licensed VSPs, or go through a viatical settlement broker who will shop for a viatical settlement provider for you. | Check first with your life insurance agent. Most insurers offer this option. |
| What type of policy qualifies? | A VSP can buy almost any type of life insurance policy, including term, whole and universal life. | Life insurance companies usually limit this option to certain policies. |
| Who pays the benefit? | The VSP pays you in return for the rights to your life insurance policy. | Your life insurance company pays you. |
| How do I get the money? | Contact a licensed VSP for an application and to find out what you must do to prove you are terminally ill. | Contact the life insurance company that issued the ADB option. Find out what you must do to prove you are terminally ill or have a qualified covered condition. |
| How much can I get? | VSPs pay a lump sum from 50% to 85% of the face value of your policy, depending on your life expectancy. | ADB options usually pay 50% to 80% of the face value of your policy. You may be able to choose between a lump sum or monthly payments. IL law also lets life insurance companies pay up to 75% of the policy's face value for some specific medical conditions, such as heart attack, Alzheimer's Disease, or major organ transplant. |
| What happens to my life insurance? | The VSP will pay the rest of the premiums. The insurance company will pay the policy's benefits to the VSP upon your death. Your beneficiary will not receive the death benefit. | You must keep paying the insurance premiums if you want the company to pay the beneficiary the remaining death benefit. |
Be sure that the viatical settlement provider you choose is licensed in Illinois. You can obtain this information from the Illinois Division of Insurance.
Viatical settlements have become an investment tool. If you are asked or you are considering investing in or buying a viatical settlement policy, you should contact the Illinois Division of Insurance to learn about the issues and risks associated with this investment.
If you are asked to buy a life insurance policy and then sell it immediately as a viatical settlement, you should contact the Illinois Division of Insurance. This activity may be considered fraudulent and the individuals involved may be prosecuted.
Additional brochures are available from the National Association of Insurance Commissioners web site at http://www.naic.org.
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