Cash Settlements and Supplemental Income

August 27, 2010

What can I do if I need cash to pay for expenses?
People with life-threatening illnesses like Alzheimer’s sometimes find themselves needing immediate cash income to pay for their medical care or basic needs. There are several ways to do this, but no matter what, make sure you are comfortable with any deal involving your insurance and finances before you sign anything. It may also be helpful to consult an attorney, especially if you need money to pay for a loved one’s expenses.

What are viatical benefits?
Viatical benefits are the conversion of a life insurance policy into cash before the death of the insured. Some life insurance policies have a clause called the Accelerated Living Benefit, which entitles the policyholder to collect the benefits before death. This is a rider that typically increases premium payments, so if you do not remember choosing this, you probably do not have it. Contact your insurance provider to find out for sure.

Even if you do not have this benefit, there is another way to cash in a life insurance policy. There are companies called viatical settlement companies that purchase life insurance policies from individuals that fit specific criteria (which vary from company to company). Typically, the viatical company offers 60%-80% of the “death benefit” of the policy and pays a lump sum amount or regular installments to the policy holder. The exact amount depends on the company, the state you live in, the terms of your contract and the policy’s face value. The payment is usually tax-free.

Keep in mind that by drawing cash from the life insurance policy under these conditions or selling the policy to a viatical settlement company, the policy-holder’s survivors will no longer receive a payment when the policy-holder dies. There usually no way to get the life insurance back once it is sold, so make sure you are comfortable with your decision.

It may also be possible to get a “loan” on your life insurance policy by transferring it to a financial company. People with life-threatening illnesses are sometimes able to transfer 35% to 75% their life insurance’s death benefit into a loan, depending on their “life insurance line of credit”. Upon their death, the loan and various fees are repaid using funds from the life insurance payout.

What is a reverse mortgage?
A reverse mortgage is a way of converting the equity of one’s home into supplemental income without having to sell the home. This is beneficial because most seniors do not want to sell their home, yet many cannot afford the care that might be required in the event of a catastrophic illness such as Alzheimer’s.

In order to qualify for a reverse mortgage, the borrower must be at least 62 years of age and own his home outright, and the property must be a single-family home. The senior uses the home as collateral to borrow money, which is paid to him or her by the loan lender (usually a bank, mortgage company or credit union) either in a lump sum or periodic payments. The total amount of cash derived from the reverse mortgage cannot be greater than the value of the home. Most programs have maximum loan amounts, regardless of what the value of the home is.

There are three types of reverse mortgages:

  • Federally insured – Lenders that participate in the Home Equity Conversion Mortgage (HECM) program are backed by the Federal government, which means that if they default on your loan, you would continue to get payments. Visit the US Department of Housing and Urban Development website for more information.
  • Privately insured – These lenders are privately insured and may give you more money than federal (HECM) lenders. However, if the lender gets into financial trouble before you receive the full amount of your loan, you may not receive all of it.
  • Uninsured – These loans provide regular payments for a fixed term (usually 3 to 10 years) and are not federally insured.

Generally, these home equity loans do not have to be paid back until the senior is no longer living in the home. The loan must be repaid if the senior moves, sells the home or dies.

Can I get a bank loan to pay for my expenses?
Some financial institutions will lend money to people with life-threatening illnesses and hold the person’s life insurance or other assets as collateral and will receive repayment upon the person’s death. The amount of the loan can vary depending on state law, the company’s policies, and life expectancy. Contact a local bank or financial advisor for more information.


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