Pre-death insurance benefits can be godsend for terminally-ill


NEW YORK -- When buying a life insurance policy, ask if it allows for accelerated or "living" benefits. Few policyholders have actually used this relatively new provision. You may not even know whether your policy includes it. But at least 18 million Americans now have access to living benefits, says Gene Grabowski of the American Council of Life Insurance (ACLI). In the right circumstances, it can be a godsend for you or your family.

Living benefits let you use part or all of your policy's face value while you're still alive. This is not a policy loan. You receive actual death benefits in advance. If you have a $100,000 policy, for example, you could take anywhere from $25,000 to almost the full $100,000, depending on what the insurer allows. When you die, your beneficiary gets whatever is left.

Payments are made only to the dying -- usually people with cancer or AIDS. You cannot accelerate benefits unless a doctor certifies that you have only six months or a year to live. But to a patient who has lost his income and perhaps his health insurance, and spent much of his savings on treatments, early life-insurance payments can be an enormous relief. They can pay for home care or nursing-home care that he or she otherwise couldn't afford.

On the other hand, life-insurance proceeds spent in the last year of life deplete the benefit that was intended for your family. As helpful as extra comforts might be, the patient might conclude that it's wrong to spend money that his beneficiaries will need.

More than 215 insurers now provide living benefits, a 90 percent increase since 1991, according to the ACLI. You can get them with many cash-value policies, term policies and even some employee-group insurance. To claim the benefit, the insurer may require that your policy be of a minimum size (like $50,000). You might also have to be in a nursing home or afflicted with one of a specific list of illnesses.

Alternative ways of getting pre-death benefits out of a policy are cashing it in for its current surrender value (not possible with a term policy and not viable if you want benefits for survivors); taking out a policy loan; or asking a third party, perhaps a parent, to lend you money in return for being named the policy's beneficiary (or co-beneficiary with your spouse). At your death, the policy's proceeds repay the loan. This last may be the cheapest option, if your parent can afford the loan.

Insurers handle the minuscule cost of accelerated payments in different ways. Some add the benefits to all policies sold at no extra charge; some have offered to apply them to older policies retroactively; some charge nothing extra but require you to ask for living benefits when you buy; some charge for the benefits separately; some charge a fee when the benefits are taken.

The Internal Revenue Service has not yet ruled on whether a living benefit is taxable income. A proposed IRA regulation would declare it tax-free, says Stephen Kraus, chief counsel for pensions at the ACLI, but no action has been taken on the issue.

Living benefits compete with so-called "viatical" companies, which purchase an insurance policy directly from a policyholder, either for themselves or for other investors. (The word "viatical" comes from "viaticum," the communion given to Christians who are dying or in danger of death.) Typically, viatical companies pay 50 to 80 cents on the dollar. An AIDS patient expected to live for two years, for example, might sell a $100,000 policy for $60,000. When he dies, the investors collect. Detractors say they're trading in "death futures" for annualized returns of 20 to 80 percent.

CNA Financial Corp. in Chicago is the first insurance company to set up a viatical division, called Viaticus. Others are expected to follow.

Insurance regulators have criticized the low prices that some viatical companies pay for policies. John Banks, Viaticus' chief executive officer, says he's setting his prices based on "proper insurance methods." His disclosure form is a model of good practice.

Viaticus tells the policyholder about the alternatives to viatication (such as taking living benefits), warns that the proceeds may be taxable; and tells policyholders they can change their minds up to 30 days after signing the agreement or 15 days after getting the money.

Anyone seeking pre-death insurance payments should explore all options with his or her insurer, then compare what's available from viatical companies. You can get a free list of 20 companies that buy or broker policies from The National Viatical Association (NVA) in Waco, Texas (800-741-9465).

Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y., 10022; (212) 243-6007.

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