LIfe insurance for the living.

• Author: Schnepper, Jeff A.

Contemplation of death is difficult. Most of us fear C the unknown of our own death and for the financial security of those we leave behind. Life insurance is the vehicle we most often use to provide that financial security. It is paid when our loved ones need it the most in a lump sum or an annuity. Moreover, it usually is income tax-free and, if appropriately structured, can escape any estate taxes.

However, what if we were subject to a fatal illness where there was almost a certainty of non-recovery@ To prolong any sort of life, astronomical medical expenses would be incurred. Many chronically or terminally ill individuals with short life expectancies have sold or assigned their life insurance policies to what are known as viatical settlement providers. These companies typically buy policies from people with life-threatening illnesses for a percentage of the policy's face value.

In the past, viatical settlement payments were subject to Federal income taxes. Life insurance proceeds normally would not be taxable because they would be received and paid by reason of death. Since viatical life insurance payments would not be paid by reason of death, they would be taxable. Accordingly, people opted not to use viatical settlements because they did not want a significant part of their money going to the Internal Revenue Service.

This has all been changed by the Health Insurance Portability and Accountability Act, signed into law by Pres. Clinton on Aug. 21, 1996. It allows those suffering from chronic and life-threatening illnesses to receive the proceeds of living benefits in the form of viatical settlements free of any Federal income taxes. After Dec. 31, 1996, viatical settlement companies will be able to pay out a percentage of the policy's face value to the policyholder, assume responsibility for premium payments, and become the policy's beneficiary. Moreover, there are no restrictions on the use of the funds received from viatical settlements. This means the policyholder need not use the money for medical purposes, a final vacation or new car could be an acceptable purchase.

According to a Congressional joint conference committee, a "chronically ill" individual is one who has been certified within the previous 12 months by a licensed health practitioner as being unable to perform (with substantial assistance) at least two of daily living chores - eating, dressing, toileting, transferring, and continence - for at least 90 days as a result...