Viatical settlements: a new way to nursing home private pay.

Cash-strapped residents still have an option before turning to Medicaid

Viatical settlements, a financial resource for the terminally or chronically ill, have been around for more than a decade. But most people know little, if anything, about them. For residents of senior congregate living facilities, which include nursing homes, assisted living facilities and independent living communities, they can be a lifeline - the answer to their needs for immediate cash for a variety of reasons. These can include upgrading their living quarters to a private room, paying for costly experimental treatments not covered by traditional insurance plans or giving financial relief to family members.

Viatical settlements allow individuals with terminal or chronic illnesses to sell their life insurance policies for cash. They first became a financial planning tool in the mid-1980s in response to the AIDS epidemic. Viaticals changed the way we view insurance policies. Once regarded only as a benefit to surviving family members, life insurance policies soon became viewed as an existing asset, much like stocks and bonds, real estate and savings accounts.

Viaticals were particularly appropriate for People With AIDS (PWAs) because they had a life-limiting illness, which, at the time, had a very predictable term. In many cases, PWAs had limited access to medication and hospital care because they lost their jobs and health benefits when they became ill. Many died destitute. In recent years, viaticals have become more mainstream and are benefiting people with a broader range of life-limiting illnesses. In addition to PWAs, they include people of all ages with terminal illnesses, as well as residents of senior congregate living communities. Viatical settlements are becoming increasingly popular among seniors who require immediate cash for a wide range of needs.

Since most residents and their families are probably unfamiliar with viatical settlements, it is in their best interests - and those of management, social workers and others in direct contact with residents - to make them aware of this financial resource. Financial planning counsel can be just as important to a resident's well-being as the attention given to his medical, social, psychological and intellectual needs.

A viatical settlement is a way to access cash and reduce financial strains and resulting emotional unrest for both the resident and family. It makes the life insurance policy a valuable financial asset that can improve the quality of the resident's remaining years.

The following is a basic overview of viatical settlements and the key questions that management and personnel dealing directly with residents might want to address.

What is a viatical settlement?

The word "viatical" comes from the Latin word "viaticum," which refers to the necessary money or supplies given to a person embarking on a long or difficult journey. In the Christian church, "viaticum" is the blessing of the Eucharist given to provide spiritual sustenance to a dying person or one in danger of death.

A viatical settlement is a contract that allows an individual with a relatively short life expectancy to sell a life insurance policy for cash to a third party - an individual or business entity - at a discounted value of the policy's face value. Simply, the person gets cash in exchange for relinquishing the death benefits of the life insurance policy to the person paying for it, less a certain percentage of the benefit. The amount that the viator - the seller of the policy - receives depends upon his/her life expectancy. The viator can get as much as 80% of the policy's face value. Basically, the less time they have left to live, the more money they get.

By viewing a life insurance policy as a current asset, the insured can now access funds - the death benefits - virtually immediately as a living benefit.

The elderly might need the cash for a variety of reasons, although the needs of those with life-limiting conditions are often quite basic, but costly. Having these needs met can reduce the older person's emotional strains and subsequently improve his or her health. These needs could include:

* Paying for experimental treatments not covered by traditional medical insurance policies;

* Paying for nursing home or assisted living community care if family members are footing the bill;

* Moving to a private room, perhaps a larger one with more luxuries and conveniences, such as a private phone;

* Having a private nurse;

* Paying travel expenses for family visits to the facility;

* Funding educational costs for a grandchild;

* Making a gift to a loved one.

Nearly every type of life insurance policy qualifies for a viatical settlement, providing it's been in force for at least two years. The process is simple:

To determine the life expectancy of the viator, the viatical settlement company has a board of physicians evaluate the person's illness, basing their findings on medical records, laboratory reports and current actuarial tables. The viator then receives the cash payment after transferring ownership of the life insurance policy to the viatical settlement provider. The entire process takes about a month. The policy is then maintained by the viatical settlement company, which also pays the premiums.

What about taxes?

The federal government has established strict guidelines governing the viatical industry. Most significant is the 1996 Health Insurance Portability & Accountability Act which exempts viators from paying federal income tax on these settlements if they are terminally or chronically ill. The Act defines a terminally ill person as one with a medically certified life expectancy of less than 24 months. A chronically ill person is defined as one who is unable to perform at least two activities associated with daily living. Only in these qualified situations are viatical settlements tax-free. Furthermore, individuals qualifying for this tax-free benefit must use a viatical settlement provider who is licensed in the state where they live. In some states, funds are also exempt from state taxes.

Are viaticals for the healthy?

Now, anyone over the age of 70 with a life insurance policy who is in serious need of money can qualify for what is called a "senior settlement," an increasingly popular option. These people may be perfectly healthy or may have suffered a heart attack or stroke or have other ailments they can live with indefinitely. However, given their age and statistical data, they are candidates for such a settlement, based on actuarial life expectancy tables established by insurance companies. The shortcoming here is that a senior settlement is not tax-free.

What are the risks?

The risks for the family are clear: The children or other survivors are no longer the beneficiaries of the insurance policy. They've waived their rights to the proceeds. It has been sold and the buyer, who's now paying the premiums, will receive the death benefits. It's up to the resident and family to decide. A viatical settlement is but one financial option, but it is one that can provide convenient access to much-needed cash.

Michael Zadoff is president and founder of Dedicated Resources, Inc., a viatical settlement company in Delray Beach, Florida. Founded in 1988, it is one of the oldest viatical settlement companies in the United States. For further information, phone: [phone]; fax: [phone]; or send e-mail to: [e-mail].