Before negotiating either a viatical or life settlement or taking accelerated death benefits from a life insurance policy, consider the financial consequences carefully. The passage of the Health Insurance Portability and Accountability Act of 1996 made proceeds from viatical settlements or accelerated death benefits fully excludable from income under certain circumstances.
First, a physician must certify the insured is terminally ill or has a condition that could reasonably be expected to result in death in 24 months or less. Accelerated death benefits paid on behalf of individuals who are certified as chronically ill are also excludable from income to the same extent they would be if paid under a qualified long-term care insurance contract. However, life settlement payments may be counted as taxable income.
Although amounts you receive from viatical settlements or accelerated death benefits don’t count toward your taxable income, they could be considered income when determining your Medicaid eligibility. For someone needing nursing home or hospice care, that could be an important point. Second, certain circumstances may prevent you from accelerating benefits or changing the beneficiary of your policy as required in a viatical or life settlement. For instance, a divorce decree or court-approved property settlement could prevent you from changing your policy beneficiary.
Finally, although you might be able to use your life insurance policy to enhance end-of-life quality, don’t rely on your life insurance policy to take the place of a good long-term care policy. Long-term care insurance is specifically designed to help insureds pay for end-of-life care when needed.
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