Your Life Insurance Policy May Provide Value for You Now
There are times in our lives when we realize the importance of what we do and how good it feels to be able to helps our clients. Our very own Thomas Raetz, knows this feeling first-hand. Thomas has seen how a chronic illness can adversely affect a family’s financial plan.
Thomas’ client, 64, retired, a husband and a father, who suffered a stroke and also diagnosed with kidney failure has experienced a significant depletion in financial assets due to the costs of his care. Specifically, tapping into his pension dollars to pay for his medical bills.
Wanting to help him protect his client’s family’s assets Thomas suggested his client should apply for Accelerated Death Benefits.
Accelerated Death Benefits or Living Benefit Riders allow plan holders to access income tax-free death benefits to offset costs associated with chronic or terminal medical conditions, severe disabilities or long-term care.
For Thomas’ client it helped him eliminate debt, secured is family’s financial future and saved his dignity.
Provisions for accelerated or living benefits may be included in a policy when purchased or attached as a rider. These are sometimes referred to as “accelerated death benefits” or “accelerated benefits riders.” Requirements vary from company to company. Some companies only charge you for the option if you use it. Some riders add extra cost to your monthly life insurance premium; however, an accelerated death benefit rider is usually included on most term life insurance policies at no additional cost. These riders are usually a part of only term life insurance policies, since term policies have no cash value. A permanent life insurance policy accrues cash value, and therefore a loan may be taken against the policy to cover the kinds of expenses that would need to be covered by an Accelerated Death Benefit rider.
Death benefits from a life insurance policy are usually left behind for your loved ones when the policy holder dies. But what if you are faced with a terminal illness? Certain medical circumstances can trigger eligibility for early payment of all or a portion of your policy’s proceeds, including
- Terminal illness, such as cancer, with death expected with 24 months
- Acute illness, such as acute heart disease or AIDS, which would drastically reduce life span without extensive treatment.
- Catastrophic illness requiring extraordinary treatment, such as an organ transplant
- Long-term care needed because you cannot perform a number of daily living activities such as bathing, continence, dressing, eating or toileting.
- Permanent confinement in a nursing home
Once the insured meets the health impairment criteria, benefits are approved and the elimination period (if any) has been satisfied your fund will be available. Funds can be used for:
- Adult daycare
- Assisted living
- Family care
- Nursing home care
- Virtually any expense, even those unrelated to the illness
In general, accelerated benefits can range from 25% to 95% of the death benefit. The payment depends on your policy’s face value, the terms of your contract, and the state you live in. Some companies will permit you to accelerate 100% of your policy’s face value but will reduce the amount of your benefit to compensate for the interest it loses on early payout. Additionally, any outstanding loans against your policy will also reduce your benefit.
Each life insurance contract or rider specifies the method of payment or options. Payments may be made monthly or in a lump sum. Some life insurance policies will allow the policyholder to choose the method of payment.
Since life insurance is usually purchased to protect a spouse, children, or other dependents from the financial burden of a premature death, if you use all or part of your policy benefits, there may be little left for your family. The amount paid to beneficiaries upon the policy holder’s death is reduced by the amount they received from the Accelerated benefit. If the policy proceeds are entirely depleted, no benefit is paid after death.
In most cases, accelerated death benefits are not subject to federal income taxes. Under the federal tax code, a terminally ill person (defined as a person having only 24 months to live) would not have to pay taxes on accelerated benefits. A chronically ill person is usually exempt but may have to qualify for the exemption by being certified each year. To ensure compliance with current tax laws, check with a local tax advisor.
Accelerating death benefits may affect eligibility for Medicaid. You cannot be forced to collect accelerated death benefits from your life insurance policy before qualifying for Medicaid, but if you choose to, that money could be considered income, which might affect your Medicaid eligibility.
Some states are now passing or trying to pass legislation that requires policy owners to sell a life insurance policy to the viatical settlement market if the face value is greater than $10K. The purpose of such laws are to lower the financial burden on the state’s Medicaid Fund by requiring Medicaid applicants to spend down all of their assets before being accepted.
If the life insurance company denies your claim for accelerated death benefits based on their eligibility requirements, there may be other options available. Taking a loan against the policy cash value may be an option or a viatical settlement is another alternative.
A viatical settlement is an alternative to accelerated benefits by allowing a policy owner to sell their life insurance policy to a state licensed financial institution in exchange for ownership and beneficiary rights to the policy. With a viatical settlement, a viatical settlement company buys your life insurance policy, and pays you a percentage of the death benefit upfront in exchange for the ownership and beneficiary rights. That viatical settlement company pays all the premiums and receives the full benefits when you die. Your beneficiaries will not receive any benefits under a viatical settlement unless specifically negotiated as a term of the settlement agreement.
FOR FEDERAL EMPLOYEES ONLY
If you are a federal employee and enrolled in Federal Employees’ Group Life Insurance Program (FEGLI) you or a person holding your Power of Attorney may elect to receive a lump-sum payment called a living benefit if you are terminally ill and have a documented medical prognosis that you are not expected to live more than nine months. Eligible annuitants may elect a full lump-sum payment equal to their Basic life insurance amount, plus any extra benefit for persons who are under age 45, which would be in effect nine months after the date of the Office of Federal Employee’s Group Life Insurance (OFEGLI) receives a completed claim for living benefits. If the life insurance is reducing, the lump sum will be the reduced amount payable nine months after OFEGLI receives the completed claim form. Annuitants cannot elect a partial living benefit payment; this option is available only to employees.
Your living benefits payment will be reduced by a nominal amount to make up for lost earnings to the Life Insurance Fund because of the early payment of benefits.
If you receive living benefits after retirement, no Basic life insurance will be payable after your death. Basic life insurance premiums will no longer be withheld from your annuity. If you elected living benefits before you retired, the amount of Basic life insurance payable after your death and the premiums withheld from your annuity will depend upon the amount of living benefits you received before retirement.
Your election of living benefits has no effect on the amount of any optional life insurance you may have. Premiums for option insurance will continue to be withheld.
For more information or further assistance you may call the Office of Federal Employees Group Life Insurance at 1-800-633-4542 to obtain Form FE-8, Claim for Living Benefits.