Terminally ill individuals facing high medical costs and reduced income have some options to reduce financial concerns from their life insurance policies. These include borrowing against the cash value, surrendering the policy for its current value, borrowing from third parties, or accessing accelerated death benefits that pay out a portion of the policy while still alive and tax-free. Another option is a viatical settlement where the policy is sold to an investor for a percentage of its face value, providing cash to the policy owner during their lifetime. Several factors determine the percentage payout offered in a viatical settlement.

1. Life Insurance Options for the
Terminally Ill
The emotional stress of dealing with one’s impending death due to a terminal illness like
cancer, AIDS, etc., is further compounded by the customary increase in medical bills and a
likely reduction in earning capacity.
A person owning life insurance policies may have several options for reducing some of his or
her financial concerns.
Methods of Reducing Financial Concerns
● Borrow against cash values: Permanent type policies such as whole life, variable life,
universal life, etc., build up cash values over the years. The owner of the policy is
usually able to borrow money from the cash value, often at favorable interest rates.
When death occurs, the policy loans and any interest will be subtracted from the face
amount of the policy before payment is made to the beneficiary.
If there is also a “waiver of premium” provision the insured may be relieved of the
monthly premium payments, in certain circumstances.
● Surrender the policy: Policies with accumulated cash values can be surrendered to
the life insurance company. However, this would generally not be desirable, since the
face amount of the policy is usually much higher than the surrender value and the
time of death is close. There may also be income tax consequences.
● Borrow funds from a third party: Other friends, family members, and possibly the
beneficiary of the policy may be willing to lend money to the person who is terminally
ill and then receive repayment from the insurance proceeds.
● Accelerated death benefits: Some life policies provide for payment of a portion of the
face amount if the insured becomes terminally ill. This is generally called a “living
benefit” or an “accelerated death benefit.” Even if it is not mentioned in the policy the
company may have extended the right to the policy owner; the availability of such
benefits should be investigated.
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2. Life Insurance Options for the Terminally Ill
Some companies require the owner to have a life expectancy of from six to nine
months or less. Terminally ill persons (diagnosed by a physician as expected to die
within 24 months) may receive accelerated death benefits free of federal income taxes.
Chronically ill individuals may also exclude from income accelerated death benefits
which are used to pay the actual costs of qualified, long-term care. See IRC Sec. 101(g)
for more detail.
● Viatical settlements: Another option is to sell one’s life policy to a third party1 in
exchange for a percentage of the face amount. This is called a viatical settlement. It
comes from the Latin word “viaticum” which means “supplies for a difficult journey.”
These settlements may also be available with contracts that have no cash value such
as individual or group term life insurance policies. Factors which will determine the
amount of the settlement include:
● The insured’s life expectancy is a factor. In general, the shorter the period, the more
a viatical settlement company will pay. Some companies will accept up to a five-
year life expectancy, but many prefer a shorter term of years.
● The period in which the company can contest the existence of a valid contract must
have passed, as well as the “suicide provision” (typically two years after issue). This
period may begin again for policies that have been reinstated after a lapse for non-
payment of premium.
● The financial rating of the company that issued the policy is important. A lower
rating can result in a smaller settlement.
● The dollar amount of the premiums is a factor. The buyer of the policy is likely to be
required to continue making the payments for the remainder of the insured’s
lifetime.
● The size of the policy is a factor. Most settlement companies have upper and lower
limits; for example, a top limit of $1,000,000 down to a low-end limit of $10,000.
1 Effective January 1, 2018, the Tax Cuts and Jobs Act of 2017 established a new requirement to report certain information
when a life insurance policy is acquired in a “reportable policy sale.” A reportable policy sale refers to the acquisition of an
interest in a life insurance contract, directly or indirectly, if the acquirer has no substantial family, business, or financial
relationship with the insured, apart from the acquirer’s interest in the life insurance contract.
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3. Life Insurance Options for the Terminally Ill
● The current prime interest rate is important, since the buyer will compare the
settlement agreement to other types of investments.
After examining the above factors, a settlement company will generally offer the
owner of the policy between 25% and 85% of the policy’s face amount. The
settlement amount may be received free of federal income tax under conditions
similar to those described above under “accelerated death benefits.”
Other Considerations
● If the terminally ill person is presently receiving benefits that are dependent upon his
or her “means” (income or assets), like Medicaid, food stamps, etc., he or she must
weigh the effect of a viatical settlement on these benefits. Benefits may be terminated
or reduced until the settlement amount is “spent down.”
● If the policy also has an accidental death or dismemberment rider, those rights should
be specifically retained by the insured in the viatical settlement agreement.
● The time between applying for a viatical settlement and having the cash is generally
three to eight weeks. However, this will depend on how quickly the medical
information and beneficiary release forms are in the hands of the settlement
company.
● Most viatical settlement companies stress the confidential nature of the transaction
but they require the named beneficiary to release any possible claim to the proceeds.
If the insured does not want the beneficiary to know of the illness, he or she may
change beneficiaries just prior to completing the settlement. If the estate were named
as beneficiary, the insured (owner) would be the only one who would need to sign the
release forms.
If death occurs before the viatical settlement is completed, with the insured’s estate as
the beneficiary, the life insurance proceeds would be paid to the estate and may be
subject to probate administration.
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4. Life Insurance Options for the Terminally Ill
● Viatical settlement of group insurance policies will usually require that one’s employer
be notified.
● Confidentiality may also be lost if the policy is sold by the settlement company in the
“secondary market” to individual investors, since a new investor would want to know
the health status of the insured.
● An escrow account is generally used to make certain that the payment of the agreed
upon amount is made to the insured shortly after the insurance company notifies the
escrow company that the ownership of the policy has been transferred to the viatical
settlement company.
● Several viatical settlement companies should be investigated in order to negotiate the
best offer.
Typical Uses for the Cash Received Include
● Cover out of pocket medical expenses.
● Finance alternative treatments not covered by existing medical insurance.
● Purchase of a new car or finance a dream vacation.
● To be able to personally distribute cash to loved ones.
● Ease financial stress to perhaps further extend life expectancy.
● Maintain one’s dignity by not dying destitute.
● Pay off loans.
The sale of one’s life insurance policies can have far reaching effects and should be done only
after consulting with one’s attorney, certified public accountant or other advisors.
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