Being Alive Newsletter; Being Alive/Los Angeles - September 93
John Alan Cohan

Living benefits companies acquire the life insurance policy of a terminally ill insured in exchange for the payment of 50% to 80% of the face amount of the policy. The balance of the value of the policy is retained by the living benefits company and redeemed in full at the death of the insured. The life expectancy of the insured determines the monetary amount a living benefits company will offer to purchase the insurance policy.

There are several legal hurdles involved:

- Some group life insurance policies forbid assignment to any individual or entity not possessing an insurable interest on the insured person, in which case an exemption should be sought.

- Pertinent medical records must be furnished, and the insured's doctor must certify that the patient is of sound mind and free from undue influence.

- The insured must obtain a written waiver from the presently named beneficiaries of the life insurance, relinquishing their right to the death benefits.

- The application process is tedious and can be lengthy, with an average of 6-8 weeks from the application to payment.

- Significant income tax liability can arise, as well as impairment of the insured's eligibility for public benefits, such as Medicaid and Social Security Income. Some state laws permit the exclusion of such proceeds for purposes of state income tax, but the IRS does not.

Serious tax ramifications or loss of public assistance may be avoided by receipt of the funds into a special needs trust or by other legal procedure. The insured should seek independent legal advice so that serious problems can be overcome.

Living benefits companies will typically purchase insurance issued only by financially secure insurance carriers, and only when it can be certain that the policy is legally valid. At a minimum, the insured must have owned the policy through expiration of the period of contestability, usually two years. Finally, the issuing insurance carrier must participate in the process by agreeing to an irrevocable assignment of the policy. Attorney intervention is often necessary on the insured's behalf to prod the carrier.

(John Alan Cohan is an attorney specializing in wills, trusts and probate. He welcomes your calls at 800.255.1529 or 310.557.9900.)
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