Viatical Settlements Flashcards
What are property ownership rights?
Rights of possession, control and disposition
What are assignments?
Transfer of ownership of LI policies: absolute and collateral
Who is the viator?
Policyowner who sell his/her LI policy
What are the ethical concepts that prevent abuse of the viatical settlement transaction?
Viatical Settlement Model Act defines the following:
Pricing guidelines are based on the life expectancy of the terminally ill individual.
Income Tax exemption is applied to proceeds of a viatical settlement if the insured is terminally ill.
Terminally Ill legally refers to a person whose life expectancy is less than 24 months.
Chronically Ill individuals are unable to perform 2 of the 6 activities of daily living (ADLs) for 90+ days and/or subject to sever cognitive impairment and in need of substantial assistance.
What are two forms of living insurance/supplemental policy benefits?
Terminal Illness Coverage usually requires the insured to have life expectancy of less than one year or six months and pays a specified maximum percentage of the policy’s face amount, typically 25 to 50 percent.
Catastrophic Illness Coverage functions like terminal illness, but pays only the diseases listed in the policy under catastrophic illness.
What options does a LI policyowner have if found terminally ill?
Viatical settlement or accelerated death benefits
The viatical settlement firm becomes the beneficiary to the policy, pays the premiums, and collects the _________ after the original policyholder dies.
cash value
Michaelangelo’s option B variable universal life insurance policy has a policy death benefit of $300,000 with current cash value of $100,000. He has paid total premiums into the policy of $50,000, including the most recent annual premium of $10,000. Michaelangelo, who is age 50, has been certified by a physician to be terminally ill and is expected to die within 12 months. If he engages in a viatical settlement and receives $100,000 for his policy, what is the after-tax benefit at Michaelangelo’s death to the viatical settlement company assuming a 21% corporate tax rate and the same current policy values?
The total death benefit under option B is $400,000. The viatical settlement company has basis of $100,000. The taxable gain is $300,000 at 21% tax, leaving an after-tax-benefit to the company of $337,000.
Individuals that are considered chronically ill may benefit from tax-free treatment of viatical settlements only if the funds received are used for qualified long-term care services.
When individuals categorized as chronically ill receive viatical settlement proceeds, they may use the funds for qualified long-term care services on a tax-free basis.
