Accelerated Death Benefit Versus Viatical Settlement: Which Is Best For You?
Hearing the news that a loved one is facing a terminal diagnosis is stressful for everyone in the family, and unfortunately financial concerns can also come into play along with the prospect of impending loss. What are the options for a terminally ill senior facing mounting medical or care expenses? Can a life insurance policy be leveraged to help meet that need?
There are two different options allow a policyholder to get cash out of a life insurance policy that might not be needed anymore. Both viatical settlements and accelerated death benefits could offer financial relief to families facing a difficult diagnosis, but the two agreements are different in several key ways.
Accelerated Death Benefit
An accelerated death benefit (ADB) is a provision attached to some life insurance policies that allows consumers to borrow against the value of the death benefit in the event of a terminal illness. The ADB, which comes in the form of a cash advance, is generally tax-free if the expected life expectancy of the policyholder is two years or less.
Generally an ADB is laid out as one of the features of a policy when it is originally issued, but according to some experts most insurance companies will consider providing the benefit if the policyholder meets the requirements, even if it wasn’t originally part of the policy. According to a January 2018 article on Investopedia, individuals may be eligible for an ADB if they meet one of the following criteria:
- Diagnosis of a terminal illness with life expectancy of two years or less
- Diagnosis of any serious illness that will reduce expected life span
- Need for an organ transplant because of serious illness
- Enrollment in hospice care
In most cases, a policyholder who accelerates his or her death benefit to help defray expenses only borrows against part of the policy, leaving a reduced death benefit that is still available for the original beneficiary. For example, if an individual with a $1 million life insurance policy needs funds for health care, he could borrow against half of that policy, receiving an offer of $265,000 cash against $500,000 of life insurance. That would leave $500,000 to go to his beneficiary upon his death.
A viatical settlement is a type of life settlement, but generally viatical settlements are reserved for those who have been diagnosed with a chronic or terminal illness. A terminally ill person is defined, for tax purposes, as one whose physical condition will be reasonably expected to end in death within twenty-four months of certification. A chronically ill individual is one who has been certified by a healthcare professional with either a substantial physical or cognitive impairment.
In a viatical settlement, a life insurance policy is sold to a third party for a lump sum, and the buyer assumes the premiums and receives the death benefit when the seller dies. The proceeds from a viatical settlement are generally exempt from federal taxation, because the Internal Revenue Service considers the payout to terminally ill individuals to be taxed in the same way as a benefit upon the death of the insured. In the case of someone who is chronically ill, the settlement proceeds can be tax exempt if the funds are used to cover certain health care expenses.
How to Determine Which is Best?
If a terminal illness has caused a financial strain, a life insurance policy can become an asset while the policyholder is still alive, but the individual will need to research the details of his or her policy to determine which type of transaction is better and more profitable for the situation. Sorting out the best path to help provide financial help to a family suffering a health crisis can be stressful, and a trusted advisor could help make sense of the situation and lay out the potential advantages of either path.
The first step, for any individual or their advisor considering the two options, is to determine whether the original policy included an ADB and whether the provider is willing to negotiate one if it isn’t laid out in the original terms. On the other hand, a viatical settlement usually requires documentation of a terminal diagnosis, so if such evidence is not available an accelerated death benefit might be the right choice.
The experts at Magna Life Settlements stand ready to advise anyone who thinks they might be eligible for a viatical settlement and answer any questions about the process involved in the sale. Set up a call with Magna today to ensure the best possible advice for your family through the illness of your loved one.
*Comments provided in this post are for informational purposes only and should not be construed as financial, legal or tax advice, recommendations or solicitations. Please consult your financial, legal or tax professional with questions related to the information presented, or for advice as to whether a life settlement is right for you.