Terminal Illness & Cashing Out Life Insurance
December 19, 2008 |
Featured
Unfortunately a majority of terminal illnesses are not short and sudden. Frequently people with a terminal illness suffer for months or even years, and often spend their last dime to pay for expensive medications or trying new treatments. Life insurance is often overlooked as a financial asset that may be at the terminally ill’s disposal to help them.
Term life insurance policies are renewable at specified intervals. Sometimes it is once every year or it could be every five or ten years. If the policy holder dies within the coverage time period, their beneficiaries will receive the policy’s face value. If the policy holder does not die within the period of coverage, the policy holder does not receive anything. Most term life insurers do not offer buy out options.
With a whole life insurance policy, you pay insurance premiums and have a policy with a specified face value. These policies often come with investment interest, although it is not usually much more than the inflation rate. One additional benefit is that whole life insurance policy holders have the ability to borrow up to ninety percent against their insurance policy.
Universal life insurance is very flexible life insurance and provides a higher rate of return than whole life insurance. However, the policy holder also takes on more risk. The policy’s cash out value will depend on the amount of the policy holder’s investment and the policy’s length.
If universal life insurance policy holders become terminally ill they can request funds from either their mutual fund or insurance policy managers. Term life and whole life policy holders have to agree to a viatical settlement in order to receive funds. Viatical settlements requires policy holders to change the beneficiary on the policy to the investor’s. In exchange for being named as the beneficiary on the policy, the investor pays the policy holder part of the policy’s face value. The policy holder will receive a lump sum payment from the investor, which is usually in the range of sixty to seventy five percent of the policy’s face value. The investor will collect on the entire face value of the policy when the policy holder dies.
The shorter the policy holder’s life expectancy is, the higher the percentage of the face value the terminally ill policy holder will receive. The policy holder will also receive a higher percentage on larger insurance policies.
Most viatical statements have requirements that the insurance policy must be a minimum of two years old and that the policy holder’s life expectancy is less than two years. There are brokers who can help to facilitate the process by helping investors find policy holders and oversee the paperwork. There is no government oversight or licensing requirements for brokers, so one needs to be careful when choosing one.
Terminally ill policy holders need to thoroughly understand what the consequences are to selling a life insurance policy. They will be responsible for paying income taxes on the policy proceeds. In addition, the policy holder’s family will not have any claims on the insurance policy after the policy holder has died.
Before agreeing to a viatical settlement, terminally ill policy holders should consult with their insurance company to ask about the possibility of borrowing against their policy. Although there may be interest payments that need to be paid, they are not taxable and when the policy holder dies the loans are paid off.
Tags: cashing out life insurance early, terminal illness
