Acceleration of Benefits

In recent years, most insurance companies have included in their policies a provision that permits the accelerated payment of benefits to a policyholder who suffers from life-threatening medical conditions (such as cancer, heart or kidney failure, or AIDS), that will likely lead to his or her death within a specified time period, such as 12 months. If such an option is exercised, amounts paid during the insured's lifetime are treated similarly to a policy loan; interest accrues on the amount advanced, and the policyholder still owns the policy and must continue to pay premiums. Because the amount advanced comes from the "pure" term portion of the policy, both term and cash value policies may be written with an accelerated death benefit provision.

When available under a policy, the amount that may be advanced under an accelerated benefit provision may be limited to a portion of the death benefit (such as 50 percent), and the dollar amount to be paid may be capped (such as with a $250,000 maximum).

Viatical settlements. Not to be confused with the above-described accelerated payment of death benefits, viatical settlements occur when a policyholder suffering from a life-threatening condition sells the insurance policy (at a discount from face value) to a third-party viatical settlement company, which is in the business of buying policies under such conditions. Where such a sale is made, the policyholder typically retains no further interest in the policy, and is relieved of the need to pay future premiums.

Until recently, it was unclear whether a pre-death pay-out of proceeds under an acceleration of benefits rider or viatical settlement would qualify for the income tax exclusion available for life insurance proceeds paid upon the death of the insured. Recent legislation, however, provides that such pre-death pay-outs occurring after December 31, 1996 are excludable as insurance proceeds.