November 6, 2000
Uncommon Solutions to Common Financial Problems
For many people diagnosed with Cancer, a major problem with their diagnosis isn't in addressing the illness itself. For that we have access to a medical infrastructure comprised of the very best minds and treatments. Rather, it is addressing the host of unexpected problems that haunt people who have been diagnosed with serious illness for which they lack the resources to address and for which there are few places, if any, for them to go for solutions.
One of the most common problems affecting people with Cancer is the surprising number of unwelcome expenses they incur, such as co-pays, deductibles, unapproved or experimental treatment costs, holistic treatment, psychotherapy, diet modification, assisted living, nursing...the list goes on.
While the individual is often advised to separate herself or himself from the work environment so that they can focus their energies on treatment and recovery, many feel they cannot maintain a sufficient quality of life without their active income. The accumulation of debt, and the leave work/stay at work conflict creates substantial stressża major co-variable proven to adversely impact treatment and recovery.
A study performed in the late 80's within the AIDS Service Community determined that, indeed, stress is strong indicator in compromising an individual's life expectancy or treatment effectiveness. The study also attempted to quantify and list, by order of frequency, the various stressors associated with the diagnosis of a catastrophic illness. Surprisingly, the primary stressor was not the diagnosis of the illness, but the financial burden created in treating it.
How can we solve this problem? Is there a solution? Even if we are lucky enough to have private benefits: health, disability and life insurance, there are gaps and imperfections in their construction that provide little assistance, if any, with these unexpected expenses.
While the medical community has begun the development of programs to assist their patients in areas outside of direct medical care, and while social workers and case managers have been handed greater responsibility in assisting the patient with issues related to benefits, work, mental health, financial alternatives, etc., they receive no formal education and are often underinformed in these areas. More often than not, they are unable to assist their clients because the confines of their training tend to inhibit innovative thinking. Solving these problems often requires that we look outside the box and seek uncommon or innovative solutions to those problems that consistently materialize once a cancer diagnosis, or other catastrophic illness, has been made.
There is a financial tool, designed in the late 80's, that provides an innovative solution to the financial burden of people with Cancer, or other catastrophic illnesses. It is called a viatical settlement; is designed specifically to provide a source of relief to the financial concerns of people with catastrophic illnesses, and also provide them with the needed cash buffer to confidently separate from work. Because of its flexibility, many people find that they are able to have their cake and eat it too!
Available to people who own life insurance either through work or who purchase it privately, a viatical settlement allows an individual with a catastrophic illness such as cancer to immediately access a significant portion of the face value of their life insurance policy. In the simplest terms, it is the sale of a life insurance policy owned by a person with a catastrophic illness for an immediate, tax-exempt* payment. Like selling a car, once the settlement has been made, the insured no longer needs to carry the burden of their premium obligation, yet receives the immediate benefit of the life insurance proceeds. Settlement amounts vary based upon many variables. The primary variables include: prognosis, future premium obligation and insurance carrier solvency. Settlements range, typically, between 45% to 85% of the face value of the policy depending upon the above variables. For instance, an individual owning a $100,000 policy may be eligible to receive a tax-exempt settlement of between $45,000 and $85,000.
Basically, the insured is receiving the future value of their life insurance policy discounted to today's dollars. Prognosis is the key. The longer the life expectancy of the insured, the lower the settlement amount.
How is this solution useful? For those people plagued with the burden of debt, it is often a simple, yet effective solution to remove this burden and provide the necessary funds to meet future financial obligations as they arise. The trade-off, or so it appears, is that the future benefit is given up in return for a lesser immediate benefit. Indeed, in most cases, the opposite is true. The value of the settlement, more often than not, exceeds the future value of the life insurance benefit. While there are strategies to address this trade-off, of greater importance is whether or not the present value of the settlement you are eligible to receive is greater or less than the future face value of the policy you own. In other words, if the settlement amount less any future premium obligation can be grown to an amount equal to or greater than the face value of the policy over a time roughly equal to the life expectancy of a persons disease category, then, all other things being equal, a settlement has greater value. For example, if an individual with prostate cancer owning a $100,000 life insurance policy with an annual premium obligation of $1500 is assessed by the viatical settlement industry to have a life expectancy of 5 years, and receives a settlement offer of $55,000; at an interest rate of 10%, the settlement amount minus the value of the premium obligation over five years will roughly equal $100,000. Furthermore, the insured is able to reduce their current expenses, have access to significant funds if necessary, and will leave an amount equal to the death benefit to their beneficiary(ies). If the individual outlives their prognosis, then they will be leave a greater sum of money to their beneficiary(ies), reduce their current expenses, and also have the flexibility to access the funds todayża benefit not available in the life insurance policy. Since the reduction of stress can and often does lead to an improved prognosis, it is my experience that most people engaging a viatical settlement ultimately yield totals greater than the face value of their policies! Often, significantly so!
While this tool is not an appropriate option for everyone, you should not fear investigating the possibility. The Viatical Settlement industry is regulated by the Department of Insurance in your state of residence, and provides you with several basic rights. Primarily, you have the option of investigating a viatical settlement without incurring any fees. Secondly, you are free to accept or reject any offers made without incurring any fees. Thirdly, confidentiality is prioritized under state regulation. These regulatory controls were enacted specifically to offer the consumer the confidence to investigate this option without any concern that they have committed themselves to a transaction or will incur hidden fees.
The most common objection to viaticating a life insurance policy is the individual's desire to leave the life insurance proceeds to the beneficiary(s). The argument is that the beneficiary will need the proceeds more in the future than the insured does today. It is important to note that, if handled correctly, a viatical settlement can produce a benefit that can meet, or exceed, both objectives. In many cases, the total benefits from a well-conceived viatication can exceed the face value of the life insurance policy. Likewise, in many cases, settlement proceeds can be used to purchase replacement coverage.
Anne is a perfect example of this phenomenon. A single mother of two adult children, Anne was diagnosed with breast cancer. Her doctor recommended that she separate from work in order to focus on her health, but Anne acquired a substantial debt as a result of her diagnosis and was afraid to separate from work. She felt that she needed her active income to support herself, her children, and the debt. Having met with a benefits counselor provided by a viatical settlement specialist, Anne learned how to separate from work with only a minimal decrease in her monthly income. Unfamiliar with viatication, she was hesitant to explore the option because her life insurance proceeds were intended to protect her children after her death. After understanding that she could investigate the option without any commitment, Anne submitted an application, solely to understand her options, on a $200,000 individual and $88,000 group policy. Ultimately, she received a tax-exempt offer of 72% or $208.000. She was assisted in carving out $9,000 to replace $150,000 through specialized life insurance programs using her settlement proceeds. An additional $30,000 was carved out to remove her debt. She then used some of the proceeds to improve her home, and placed the balance of the settlement in investment vehicles incorporating features that protect people with catastrophic illness. Two years later, Anne has over $300,000 in her investment portfolio, an additional $150,000 in life insurance coverage, and has increased the value of her homeża far cry from the original $288,000 in life insurance and $30,000 in debt. In fact, Anne moved from a debtor position to having an estate exceeding $600,000!
Alex was diagnosed with lymphoma. While his income and savings were more than sufficient to take care of his needs, he discovered that a viatical settlement on his $1,500,000 policy was an extremely beneficial solution. His policy had a $360,000 loan, which was impairing the policy's performance, and would ultimately lead to the policy lapsing. The loan reduced his net face value to $1,150,000. He received an offer of $448,000. While this amount did not appear to have much value compared to the face value of $1,150,000, it solved several problems. First, the Viatical Settlement Company purchasing the file would pay off the loan in addition to his settlement. By doing so, and because of the nature of the policy, the face value of the policy would increase annually. Alex life expectancy was placed at 7 years. He determined that 10 years was a more accurate assessment. Over 10 years, at an interest rate of 10%, the $418,000 settlement would increase to $1,161,996.5. The face value of the policy will increase to $1,888,189, or $738,189 more than the current net benefit. Since viatical settlement vendors only accept amounts for which the contract to purchase, the $738,189 benefit will be paid to his beneficiary. This transaction would offer him a total benefit of $1, 900,185--$750,000 than his policy is currently worth, and would remove the risk that his policy would lapse because of the weight of the loan on his policy. Alex increased his policy value by a substantial amount, generated immediate funds for his and his families use, and removed the risk from his current program!
Not all viatical transactions will look like Anne's or Alex's. Since viatical settlements, like life insurance, are individually underwritten, the settlement amounts will vary from case to case. However, viatical settlements provide proactive solutions to many financial issues experienced by people with catastrophic illnesses. And, investigating a settlement provides valuable information as to your financial options without obligating you to complete a transaction or incur any cost.
There is a line from a song by the popular artist, Annie Lennox that tries to make sense of the experience of living with a catastrophic illness. She sings, "Dying is easy, its living that scares me." Living with a catastrophic illness is frightening because it is so complicated on so many levels. One thing, however, has been proven to be true. Those that are proactive and creative are survivors. Be proactive. Seek unique solutions. Think outside the box. And don't be afraid to investigate uncommon solutions, like viatication, to common problems. Viatication is a perfect example of acting outside the box to create solutions to common problems associated with catastrophic illnesses.Scott Wilbanks
Wilbanks & Associates, Inc.
2263 15th Street, San Francisco, CA 94114