One innovation spawned by AIDS is that there are now new ways to generate cash from life insurance. Many insurers now have added accelerated benefit features to life policies that provide early payout of the death benefit, in whole or in part, if a physician signs a statement that life expectancy may be 6 or 12 months. Most policies now can be sold to a viatical settlement company if life expectancy can be shown to be up to two years - and in some cases up to 4-7 years. In some cases, policies are being used as collateral for private loans - a tailored & tax-free solution.

Some use this cash to clean up the past, to arrange their affairs, to provide for others. Some use it to play catchup on all the things and experiences they never had. Some like just knowing it's there. Yet others seek to realize unfulfilled dreams, take projects off the shelf - and in essence become entrepreneurs.

For the entrepreneurially minded living benefits are clearly a boon. A person with HIV can capitalize new avocations and preoccupations with cash from life insurance. Instead of being waiting for death a person with HIV can construct a new period of life with a new lifework unlinked to job income.

When life is threatened, the right question may in fact be "why not?" - especially with these new sources of funds. When thrust into the world of high risk, it's that much more important to be in charge of life, to express ourselves to the hilt - and, incidentally, to come out of the closet.

Fighting life-threatening illness demands entrepreneurial skills and resources in any case - and medical activism requires cash. If disability insurance isn't already lined up or can't be had through a corporate job, it's almost impossible to get. And most corporate disability plans pay only 60% of former salary, taxable - at a time when non-reimbursed expenses are accelerating. On top of all this, disease or accidents can be a rude wake-up call to dreams shunted aside and interests starved while "making a living" - items screaming for funding NOW.

Strategy Choice

If a loan from a friend or family member is possible, use a loan agreement to separate out the emotional issues and make the transaction tax-free in the eyes of the IRS - by charging reasonable interest.

Research carefully to see if accelerated benefits are available. Because they're frequently an addition to policies already in force, agents often don't know about them. Because they're new, customer service clerks sometimes say they don't exist. Because they're rarely requested, inquiries to claims should go to a supervisor. It may even be worthwhile checking with the insurer's public relations or President's secretary to see if they're about to be approved. (And approval by state insurance departments can take 6-12 months.)

Some insurers structure this benefit as a lien against the policy, charging interest - and not issuing a 1099 to the IRS. Others consider it a payout and issue a 1099 for the income from the sale. In any case, it is very possible in 1995 that the powerful life insurance lobby will convince lawmakers to make these payouts tax-free; they're already tax free in California and New York. In the meantime they're probably taxable income - check with the life insurance company.

Why is the life industry promoting accelerated benefits? Because now they have a new sales argument: policyholders can get cash from the insurance while they're alive. This is also the industry's response to viatication. So insurers and regulators have made the application process simple and short - typically a box for the doctor to check off. Payment is often made within weeks.

Hired Help

Viatication is a task equal to buying or selling a house with few protections - except in California, New York - and Kansas. It's a wild west industry that rewrites its rules regularly.

The industry is loaded with brokers who advertise heavily and get 4-7% commissions off the full value of the policy - equivalent to fully 10-12% of the settlement reached. Brokers may actually have few relationships with funders and may have financial incentives to steer business to funders offering the highest commission - not the highest offer. Yet brokers continue to claim to represent the sellers and can hide their true compensation arrangements in all states except New York.

The secret to the viatical game is getting competitive offers. Of the 60+ firms, a dozen or so have their own funds - most of the time. To win the game the seller must identify at least several such firms - and negotiate hard.

In the face of this difficult task it makes sense to hire an experienced seller's representative, paid only by the seller, to find the firms and drive the bargain. Such hourly fees should not end up running more than a tenth or so of a broker's commission.

If you do it yourself, employ old-fashioned buyer-beware consumerism. Preventive Measures

First, invest adequate time and effort into this complex, important transaction. Determine whether loans, or accelerated benefits are possible. Evaluate your overall financial needs and medical situation.

The policy must be beyond the two-year contestability & suicide clause periods. Insurer ratings of B+ or above are an advantage - but not necessary. Current beneficiaries must agree at sale to relinquish their interests (or be changed beforehand). If there are minor children, some buyers refuse to proceed; others require proof of provision for their needs.

Line up psychological support for this high-anxiety process. Seek out peers who've done it already. Talk about it in therapy. But beware of well-intentioned advice that comes from either the moralism or sensationalism viatication provokes.

Talk to your doctor well in advance. Many doctors are wary that low life expectancy estimates will undermine a patient's optimism - when it may in fact promote life. Statements of mental competency are required.

Apply to enough companies (3-5) depending on the amount at stake and the complexity of the policy so you'll end up with competitive offers. Give priority to firms who've registered in NY or CA.

Give a total of 6-10 weeks to the process to allow for glitches and to keep stress down. Significant delays may occur with antagonistic or inexperienced insurers - or complex policies.

Many group policies have restrictions on assignment or irrevocable beneficiary designations - key ways viatication works. Multiple revisions may have to be researched in the master group policy. Employer contact may be necessary.

Most buyers prefer policies where sellers have already been granted a true disability waiver of premium (which usually occurs 6-9 months after having gone out on disability). Some require converted policies.

Get all offers in writing, net of any "fees". New York law requires that a legal escrow agent be used to hold both the payment and transfer papers while ownership is changed. The seller may reverse the transaction within 15 days after receiving payment. Insist on these protections.

T-cell counts of 200 or less open up potential offers of 60-80%. Hospitalizations and opportunistic infections should increase the offers. Obviously this is a highly subjective process deserving hard negotiation. Even with a prescreened selection of companies I regularly see initial offers that differ by 15-20 points or more - or that are increased 4-10 points with valid competition. Larger policies and those where premiums are already paid by a disability waiver may command higher percentages.

Seller beware! Beware initial lowball, "limited-time" offers, hard-sell tactics, estimates or offers given without records or policy information in hand, denial of tax liability, "hunting License" contracts (offer made, signed & then funding is sought), extravagant asset claims, stress on speed (at the expense of return), and breaches of confidentiality.

Refuse to be rushed or pressured on offers. Improve your negotiation skills and/or get a third party to negotiate. Simple errors can cost thousands; a few percentage points can generate thousands.

The Tax Question

While free of local tax in California and New York, viatical settlements are taxable income. With no vocal constituency and antagonistic industry associations, it's iffy that Congress will make them tax-free soon.

Many who viaticate do appear to ignore their tax liability. However people can notoriously underestimate what the IRS considers to be included in their estate - and may be passing on the tax liability to their heirs.

In some states the income would be fair game to creditors 180 days before or after bankruptcy. Policyholders may be disqualified from income-determined entitlements (such as Medicaid or SSI (Social Security Income)) when they receive the sale proceeds. There are solutions to this problem; seek qualified counsel.

There is no tax impact on non-income-determined insurance benefits such as Social Security Disability, statutory short-term disability, most long-term disability or Medicare.