Legislation that was still pending in Congress as of this writing would make the growing practice of selling life insurance policies more profitable for people living with HIV. The proceeds from selling a policy, a process known as viatication, have been taxable as income. In contrast, payment of the face value to the beneficiary after a policyholder's death is free of federal income tax. AIDS advocates have long argued that when the same money is paid out before the policyholder's death it should enjoy the same freedom from taxation. The pending legislation would do just that for the proceeds of both viatical settlements and accelerated benefits from life insurance policies.

Although living with HIV is expensive, viatication and other new techniques for getting cash out of life insurance can relieve many financial problems. Learning how to avoid getting less than full value, being disqualified from entitlements, or creating large tax liabilities can lead to big payoffs. Let the seller beware - here's how to do it.

Choose among the alternatives

Viatical settlement, or viatication, occurs when the ownership rights to life insurance coverage are sold to a viatical settlement company in exchange for a percentage of the policy's face amount, usually 50-85%, depending on the company's assessment of life expectancy (usually less than 2 years).

Accelerated benefits, or acceleration, require a special rider on your life insurance in order to pay part or all of the policy face amount, directly from the insurer, ifÿyour doctor signs a statement certifying the insured's life expectancy at less than 6 or 12 months.

If family or friends are financially able, private loans can be made using life insurance as collateral. If the lender charges sufficient interest (now 9%) on the loan, the Internal Revenue Service (IRS) may view it as a non-taxable loan. In practice this requires a great deal of trust; otherwise the same precautions that a viatical firm would take are necessary.

If needs are small or temporary, a policy loan may suffice if the life insurance policy functions as a savings plan.

Inventory your needs

Think through your needs and wants. If you want to pay off creditors, determine whether under state law your disability income may be protected from creditor claims. If it's to pay off medical bills, make sure you've fully tapped state reimbursement programs; buying catastrophic medical insurance cover future needs.

If you lack medical, disability or life insurance and can work, getting a job rich in benefits might be possible.

If you depend on income-determined public entitlements such as Medicaid or SSI, large amounts of cash may disqualify you. There may be ways however to limit the period of disqualification. Seek legal or social services counsel.

The IRS plus most states and localities with income taxes tax viatical settlements and many accelerated benefits. Consider carefully how you're going to handle taxes now before the momentum of the process takes hold. (See "Provide for Taxes" at the end of this article.)

Decide on timing - and your wants

Do "what if?" scenarios. Budget how much you'll need under different circumstances. Apart from not providing adequately for dependents, the worst mistake may be taking action too late. Plan for the worst - and hope for the best. You may wish to finance alternative treatment, a lifedream, a higher quality of life - or a new phase of life.

If you have a large policy, you can viaticate partially. If you have several, you can space out your infusions of cash. A few companies have advance payment programs, but these charge high interest. A few will bid where they estimate life expectancy at 3-4 years but offers will be low. A few companies make installment offers (not allowed in NY) with 40-50% of the offer amount followed by quarterly payments held in escrow as long as the seller lives; these offers are substantially higher because both seller and buyer assume a risk.

Research potential problems

If you don't want to be in the position of asking them to sign off on your offer, change them. Unless a policy designates a beneficiary as "irrevocable," you don't need consent to make the change. Make your estate the beneficiary only if you have a current will that's unlikely to be contested. One offer was delayed weeks while an ex-lover held back his signature, requiring the beneficiary to be changed twice.

Only individual policies past typical two year incontestability and suicide periods can be sold. These provisions can vary greatly on group policies.

Individually-purchased policies are easier and quicker to viaticate than group policies which may have restrictions on the assignment of ownership rights. Many have "family values" language restricting assignment to blood relatives or prohibiting transfer "for value." NY law now prohibits restriction of assignment unless all assignment is forbidden.

Check whether accelerated benefits are available, a new technique explained in the section "when insurers pay directly" immediately below.

When insurers pay directly....

Accelerated benefits are offered by large insurers but exist on only 4% of all existing policies. They are rare on group policies because they're so new. One insurer recently indicated they would only be allowed on groups of 500, and then only if claims were administered by the insurer; thus they excluded both small businesses and large groups who self-administer.

Insurers may not apply them to old or small policies; one applicant with an $18,000 policy was refused because of a $25,000 limit.

Approximately half of all accelerated benefits are paid out as if they were a death benefit. Estimated interest and administrative charges are deducted - and a 1099 form, declaring the payment to the IRS, is generated. The other half of accelerated benefits structure the amount as a lien, accumulating interest against the remaining death benefit - and do not issue a 1099. Before accepting an accelerated benefit offer from your insurer, check with its legal department as to how they handle it - and as to its tax status. Then consult a knowledgeable CPA or tax attorney.

It's often difficult to find out if these benefits exist because they're new and because many confusing names are used to describe them. They are called ADBs (for Accelerated Death Benefits) and "living needs benefits." Because accelerated benefits are frequently an addition to policies already in force, the insurance agent often doesn't know about them. Because they're new, customer service clerks sometimes say they don't exist. Because they're rarely requested, ask for a supervisor when dealing with claims. It may even be worthwhile to check with the insurer's public relations department or the executive office to see if accelerated benefits are about to be added to your policy. One family had been told twice that there was no accelerated benefit; two more calls by a specialist revealed there was a 100% benefit, which saved their house from foreclosure.

Keep in mind though that state approval of these riders is required before the insurer can offer one and that this approval can itself take 6-12 months. In two cases, applicants had to wait 14 months for approval, a long-time when the requirement is a 12-month life expectancy.

Most insurers allow acceleration on only part of a policy, often only 25-50% - a reflection of the industry's assumption that life insurance is for those left, not the living. The remaining balance may be able to be viaticated. However, if the remainder is structured as a lien (about half the time) many viatical companies may not bid, or may greatly reduce their offers, because interest for the amount accelerated is accumulating against the remainder.

Most applications require simply a doctor's signature and a box to check. However, some companies may inexplicably turn applicants down; moreover, there is usually no official appeals process.

Many doctors believe they may be liable for life expectancy inaccuracies; much assurance and explanation may be required to counter this. Unlike viatication, the acceleration process can be simple and short. Payment is often made within weeks. Typically you can only accelerate a policy once.

Accelerated benefits, while good for emergencies, may be too late to be of much help to people who are very seriously ill.

Locate potential bidders

From this point on, let's talk only about viatication.

When calling companies ask if they are licensed and if they are a broker or self-funded. Most companies advertised in the industry are brokers - see "The Cost of Brokering..." below. Because brokerage costs are so high, it is best to deal with self-funded firms in competitive bidding.

How many firms to choose depends on many factors - see "What Offers Are Based On...." If these factors are unknown or you don't have time to research them, choose 3-5 viatical firms that are self-funded and state regulated.

It may pay to hire a negotiator who represents only you and not the viatical companies. Your negotiator should have proven viatical experience and should know about alternative ways to solve the financial problems sparked by HIV. Billed hourly or as a flat fee, but not as a percentage, the work should cost less than 0.5%-1.5% of a policy's face amount. You can keep costs down by contracting out some of these tasks, doing as much of the preparation as you can.

The cost of brokering....

Brokers, on the other hand, represent buyers, not sellers, and are typically paid by the purchaser when the sale is closed. Yet many brokers advertise their services as "free" and imply they represent the seller. Given the fact that their commissions are a high percentage of the money paid to the seller, that they come out of the total money available for an offer, and that they are paid by the buyer through a side agreement, the very opposite is true.

Commissions are calculated on total policy face value. Thus, a typical commission of $6000 on a $100,000 policy can amount to a high percentage of the net offer that the viator receives.

On a $100,000 policy:50% offer 60% offer70% offer80% offer

Commission amount$6000 $6000$6000$6000

Net offer received $50,000 $60,000$70,000 $80,000

Commission as a %

of amount received12% 10% 8.6% 7.5%

Because commissions are not calculated on the net offer, brokers have little financial incentive to pursue higher offers. In one example a broker reported a final offer of 75%; the company represented confirmed it would go no higher. Yet after competitive bidding, that same company paid 86%, presumably reducing the commission.

Because commission agreements must be concluded before a broker will do business with a company, brokers may be able to do business with only a few of the self-funded companies. Some self-funded companies encourage brokering; others advertise and seek to deal direct.

Commissions may vary from company to company, so brokers may have an incentive to steer business to the company that pays the highest commission to the broker rather than the highest offer to the seller. In one instance, a broker gave offers of 35% and 60%, claiming that the offers were low due to the policy's being unrated by the insurance industry's three rating services. A negotiator was able to get 83% in less than a month because the insurer in fact had been bought by a A-rated firm.

Ask if the company you call is a broker or self-funded - or does both. Ask if they're licensed by any state. Ask if they'll engage in competitive bidding. Brokers may be useful in cases where life expectancy is judged longer than two years or where policies are below $25,000. When dealing with a broker, ask what companies the broker deals with, whether commissions differ from company to company, and whether the broker's compensation is negotiable. Have the broker commission amount explicitly set out in the purchase agreement.

Prepare the information required

For group policies, identify the contact person in the group responsible for filling out viatical questionnaires. If the group has not designated such a person, delays will result. Some employers and insurers may refuse to fill out these questionnaires or may refuse to respond to viatical companies unless you intervene. One major utility stalled a questionnaire over three months.

Find out if your employer will consider adding an accelerated benefit to its contract; often it adds little or no cost. Faced with a wave of viatications, a major AIDS organization in NY recently added this benefit to their coverage.

Get a single copy of your medical record, which you can then copy and send with each application. Physicians' offices are overwhelmed with paperwork and need diplomatic followup. If several viatical companies contact the office for forms and records, physicians may charge high fees and delays may occur. One seller with a Medicaid doctor never succeeded, over a six-month period, in getting his records; he died poor. Another finally sat in his physician's reception area, threatening not to leave until he got his records.

Faced with a medical questionnaire requesting an estimate of your life expectancy, your physician may react unpredictably. This is crucial with an accelerated benefit since the only requirement often is the doctor's signature. In viatical settlements, physicians weaken their credibility when they estimate life expectancy too low (a rare occurrence). When physicians overestimate life expectancy (the usual case), they give firms ammunition that can be used against the seller. In many cases, physicians refuse to make any estimate, perhaps believing that patients would interpret a low estimate as a prescription to die or seeing viatication as a sign that they have failed.

Lastly, use only one self-funded viatical company's set of authorization forms; most other companies will accept it. Beware of elaborate application forms that ask intrusive, insensitive questions; one even asked the name of the undertaker. One applicant kept putting aside the application for months because it represented a moment of truth. If you don't like the questions, skip them. Some companies use only medical and insurance information authorizations, rather than application forms. Seek counseling if this brings up issues that are hard to deal with alone.

All companies will prepay overnight delivery of the information package. Many companies will pay for copying costs. If you have assembled this information, that may be justification for you to ask for a better offer.

Monitor progress

If you have an individual policy, processing may take only a few weeks. If you have a group policy, expect significant delays - though if you've prepared the way, these delays can be minimized. The industry's firms take widely differing times to come up with their first bids.

Negotiate a competitive bid

The viatical industry is a somewhere between the Wild West and a Mideast bazaar, run by entrepreneurs - not doctors nor actuaries. Offers differ dramatically in two ways: initial vs final offers, and offers from company to company. In sixteen offers during early 1995, starting and ending offers differed by an average of 16%, with a range of 3%-48%. In a review of competitive bids among nine companies, no one company won more than 20% of the time. This confirms why sellers should be skeptical about recommendations of a "best" or "highest" company.

For instance, the mere mention that one case would be competitively bid brought an immediate increase of 5%. Although, after a while percentages can seem like funny money, remember that on a $100,000 policy each 1% is worth $1000. Also keep in mind that too much back and forth bidding and too many small jumps may cause bidders to drop out.

Negotiating style varies widely as well. While one company prides itself on its technically determined offers and rarely budges, others consistently low-ball and are ready to raise bids.

Above all this is a business, with unknown profit margins, uncertain marketing, inexact calculations, and high risk. This is a sellers' market because not enough policyholders are offering their policies for viatication. And the companies don't make money unless they buy policies.

What offers are based on...

Offers are first based on estimates of life expectancy. Some firms seek people with low life-expectancies; most accept 1-2 years; some go to 3-4 years. Yet estimates can vary by 6-18 months from company to company because the industry's firms use, and change, consultant physicians in different ways.

Other factors may be as important and each can change abruptly. Some firms may refuse policies above $250,000; others pay a premium for them. Some make it a point of honor to purchase small policies; some won't touch them. Some may have excess funding and few policies to buy; others may have tight money or a sudden influx of policies. Some may have monthly or quarterly goals to make; some may have experienced recent high losses. Some have limits imposed by conservative funding sources; some are funded by wealthy individuals. Some may insist on A-ratings; others are indifferent to ratings. Some firms like waivers of premium on group policies if sellers are disabled; others require these group policies to be converted to individual policies. Some discount because of high premiums; to others premiums are inconsequential.

All these factors teach one lesson: seek competitive offers.

Review the offer

The paperwork accompanying an offer is complex. The amounts are large. Require the use of an independent escrow agent. This is a new area. Pay for experienced legal review. Keep in mind that licensing varies from state to state; moreover, some firms ignore state licensing requirements.

- If there are accidental death and dismemberment (AD&D) benefits, secure them to your beneficiaries to prevent windfall profits.

- If coverage increases over time, a clause should apply at least the same percentage to the increases and the money should be put in escrow.

- If a loan is outstanding, it will be deducted from the offer.

- Beware of firms who delay payment while they carry out processing they should have completed before the offer was made.

- Once paperwork is exchanged, confirmation of change of ownership by the insurer can be as speedy as a fax or can drag on for a week.

- Getting the check can be another moment of truth: someone really believes your life expectancy is limited - enough to put their money down. Prepare psychologically for this. And remember this is a business game, an artificial market played with approximate ballpark figures which do not give you a specific aisle and seat number.

The Benefits of State Regulation....

Regulation usually requires that the money be paid into an independent account held by an escrow agent (usually an attorney) before the buyer can send offer papers. When the insurer confirms the change of ownership to the escrow agent, the money is wired or sent overnight directly to the seller.

In the early days of the industry, over 30 consumers signed policies over to a viatical company which in fact had no funds to pay for them, tying up the policies and wasting valuable time.

In regulated states, the seller usually has a period to rescind the sale, usually 15 days after the money has been received. Provide for the unexpected. One fellow, close to his family, sold a policy on which his fiance was the beneficiary; he died during the 15 day period, but in this case his family did not reverse the offer - preventing her from collecting on the policy.

Regulation subjects buyers and brokers to scrutiny under threat of loss of licensure. Regulated states often make settlements free of state and local tax (such as in CA and NY). Regulation is often based on the model proposed by the National Association of Insurance Commissioners (NAIC); ask companies if they respect the disclosure, escrow, and minimum offer levels set by that model.

Regulation in NY requires brokers to disclose explicitly how much they are paid and by whom before representation documents are signed. The seller should require that the broker commission be stated as part of the purchase agreement, with no side agreements.

Regulation requires brokers and self-funded companies to research and inform sellers of accelerated benefits. In a recent case, the seller qualified for 100% accelerated benefits - but the viatical company did not inform him of this superior solution.

Ads in 21 gay publications in Spring 1995 claimed that regulation threatens the confidentiality of records held by a licensed company. The opposite in fact is true. State insurance departments and the NAIC have verified in writing that they do not require reporting of individually identified records. Any claim that regulation hurts consumers should be challenged.

Provide for taxes

In 1994 the IRS released proposed regulations for comment that would have made accelerated benefits but not viatical settlements tax free. Later in 1994 Congress considered the issue, but it didn't pass.

This year the House has passed H.R.8, a senior citizens tax bill, that includes tax-free status for both accelerated and viatical benefits. While this bill has Republican support, it faces an uncertain outcome in the Senate - or in eventual committee reconciliation.

Under the House bill, tax-free treatment would go into effect January 1, 1996, for people where life expectancy is estimated at 24 months or less. This last provision may be challenged by the life insurance industry since accelerated benefits are offered only with a 6-12 month life expectancy. Hopefully, separate rules will be provided for accelerated benefits and viatical settlements, providing overall support for passage of the bill.

Safeguard your funds

Sometimes, for a person not used to handling large sums, these dealings can acquire an unreal quality, but the settlement and its consequences are very real indeed. In one case, the seller arranged a loan to leave a stressful job early, did a viatication early to buy an apartment near his family, viaticated another to make the move, and negotiated an third viatical installment plan to supplement his disability income. He now has one policy as a cure fund to pay for new treatments and another to provide for his siblings.

Your investment profile should resemble a retiree's: protect capital, provide reliable income. Beware of the experience of widowers and lottery winners: friends asking you to invest in their business schemes, investment sharks, splurging. One widower, reported in the New York Times, was cleaning toilets only a few years after receiving over $400,000. Since HIV presents great uncertainty, you should make sure that your cash is readily available. If you yearn to nest in real estate, consider renting and leasing. The best time to think through how to spend the money is before getting it.

In short

Getting cash out of life insurance can be easy - and costly. Getting a fair offer is hard work. There is much that a seller can do to increase their final offer. It may pay to hire expert help.

This is a business, with no free lunch. Its newness, high commissions, and low barriers to entry, have attracted brokers who claim to represent sellers when in fact they are paid by buyers. Its lack of regulation initially attracted firms looking for quick, high profits. Tax issues are blurred and changing.

There is much need for financial activism to get employers, insurers and physicians to cooperate in the process, to eliminate restrictions, to regulate the market, and to provide equitable tax treatment.

Yet for all this, accelerated benefits and viatical settlement are pumping more money into the lives of people with HIV than any other source. People can fight HIV with dollars - and this money is literally saving lives.