Transfer for Value Rule
This sounds complicated, but, it is not. It means if something, (like a box of cereal), was transferred for value (money), the person selling cereal has to pay taxes on his profit (gain).
MR. WATSON: Now we know that death benefits are tax free. But the "transfer for value" rule states that if the policy is transferred or assigned for "valuable consideration" (sold, like a Viatical) and then the insured dies, the person who now owns (bought) the policy will have to pay taxes on the gain. There are some exceptions when the transferred property is NOT taxed. They are:
- transfers for value to the insured
- to a partner or partnership of the insured
- to a corporation where the insured was a shareholder or officer.
These would be tax-free transfers.
Living benefits
Accelerated Benefits
MR. WATSON: Who can explain accelerated benefits ?
MAN: If the insured has been diagnosed with a terminal illness, (a Dr. has certified the guy is going to die with-in two years) then a portion of the face amount would be payable to him by the insurance company, say 80% of the death benefit. Then, when the insured dies, the balance, 20%, would be paid to the beneficiary. All benefits paid to the insured and his beneficiary will be tax free to them. Terminally ill benefits are tax free.
MR. WATSON: Good. But accelerated benefits also pays if he is chronically ill. This means that, with-in the previous 12 months:
- he is unable to perform at least two activities of daily living with-in the last 90 days (eating, toileting, transferring, bathing, dressing, continence) or
- requires supervision because of cognitive impairment (problem with perceiving, thinking, or remembering)
MR. WATSON: These benefits are generally tax free as well.
MR. WATSON: Again, if the guy is terminally ill, the benefits are tax free. If chronically ill, there is a limit the insured can receive tax free.
Viaticals
MR. WATSON: Who can explain a viatical ?
MAN: All right. I think I'm going to die, and my policy is worth $100,000. So some guy goes, "I will give you $75,000." I assign or transfer the policy to him and when I die he gets $100,000 for a taxable gain of $25,000. The amount I receive is tax free.
MR. WATSON: Holy smokes!!! That was great, but with a viatical, for the sale to be tax free, the sale of the policy must be to a qualified viatical provider, someone who regularly does this. The one selling the policy (terminally ill guy) is called a viator. To be licensed as a viatical broker, a person must first be licensed as a life insurance agent. The HIPAA law made this tax free transaction possible.
WOMAN: What's a Hippa?
MR. WATSON: HIPAA. Health Insurance Portability & Accountability Act. Before congress passed HIPAA, the amount the insured received was taxable.
MR. WATSON: So, terminally ill, tax free to the insured. Chronically ill, tax free with a limit of a little more than a hundred thousand.
Life Settlements
MR. WATSON: Life Settlements are the same as a viatical except the guy is not terminally or chronically ill. He just wants to sell his policy and make some money. Let's say I have a $500,000 policy with $100,000 of cash value. I need money but don't need the life insurance anymore. I have several options. Borrow against the policy or cash it in. Both of these options give me $100,000. But, I might be able to sell the policy for $200,000. The guy I sell the policy to becomes the owner, payor, and the beneficiary. When I die he receives $500,000. His cost would be the $200,000 he paid me plus the premiums he has paid in. With me?
MAN: Doesn't seem right. The guy might "whack you"!
MR. WATSON: Might. You know he won't be calling 911.
