Life Insurance and Viatical Options

Many individual and group life insurance policies include a rider that pays part of the death benefit early if the insured person has a terminal illness, and some cover chronic or critical illness as well. The amount paid now is subtracted from what beneficiaries receive later, and insurers may charge a fee or apply a discount. Eligibility usually requires a doctor's statement about life expectancy or the illness. Call your insurer, or your employer's benefits office for group coverage, and ask whether your policy has this feature, how much can be paid, how long it takes and what documents are needed.

In a viatical settlement, you sell your life insurance policy to a company or investor for a lump sum that is less than the death benefit. The buyer takes over premium payments and collects the full benefit later. Offers can vary widely, and brokers may take a commission, so comparing several offers matters. Many states license and regulate viatical settlement providers and brokers, and your state insurance department can confirm whether a company is licensed. Read every document before signing, ask how the offer was calculated and find out how your medical information will be shared and protected.

Early payments from life insurance may receive favorable tax treatment in some situations, but the rules are detailed and depend on your circumstances. Lump sums can also affect eligibility for means-tested programs such as Medicaid or SSI if the money counts as a resource. Selling or drawing down a policy means your beneficiaries will receive less or nothing from it. Before deciding, compare other sources of help, such as disability benefits, hospital assistance and possible asbestos compensation. Talk with a tax professional or financial advisor, and include the family members who were counting on the policy in the conversation.

1. 1

   Call your life insurer or benefits office and ask whether your policy includes an accelerated death benefit.

2. 2

   Request written details on the payout amount, fees and effect on beneficiaries before applying.

3. 3

   Check with your state insurance department that any viatical company or broker is licensed.

4. 4

   Talk with a tax or financial professional before accepting an early payout or selling a policy.