The principal advantage is that terminally ill or severely chronically ill insureds can receive advanced payments on policy death benefits potentially free of income tax. If the insured is terminally ill, he can use the proceeds for virtually any purpose desired. For example, insureds may desire to use the proceeds to:
- cover out-of-pocket medical expenses;
- finance alternative treatments not covered by existing medical insurance;
- purchase a new car or finance a dream vacation before he or she cannot enjoy such things;
- personally distribute cash to loved ones;
- maintain his or her dignity by not dying destitute; and/or
- pay off loans.
Although insureds entering into a life settlement enjoy many of the same advantages as viatical settlements with respect to the use of the lump-sum proceeds from the sale (although they generally don’t enjoy the same tax advantages as is discussed in “Tax Implications” later), some additional advantages include:
- a greater amount of proceeds may be received than if the policy had been surrendered;
- relief from premium payments for coverage they no longer need or desire; and
- proceeds can be used to purchase potentially more coverage than would be available via a 1035 exchange (or in situations where a 1035 isn’t available, such as going from single life to second-to-die coverage).
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM