Accelerated Benefits and Claims

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Accelerated Benefits and Other Claims

Buying the right policy is only half of the life insurance challenge. Successfully making a claim is the other-and probably more important-part.

During the insured person's lifetime, the owner may select from several different options for paying the proceeds of a life insurance policy to beneficiaries. The most common of these include:

• lump sum
• interest only
• total amount spread over several years
• fixed amount every year for several years
• lifetime income

This is important to consider where the beneficiary may not be experienced in investing large sums of money, where minor children are involved or when the insured is clear on specific goals. In any of these situations, you may want to request one of the scheduled distribution plans.

Example: A beneficiary who was receiving payments under a lO-year fixed period option dies during the sixth year, so the present value of the remaining payments will be paid to the beneficiary's estate.

Another example: If the same beneficiary had requested that upon premature death the remaining payments continue to be paid in installments to another person (a contingent beneficiary), and the insurance company approved, the remaining payments wollld be paid in this manner to the other person.

A caveat: These provisions for payment following the death of an insured person only apply if there are guaranteed amounts unpaid. Nothing would be payable under the straight life income or upon the death of the last survivor under a joint life income annuity.

Structured Settlement Options

Structured settlements provide alternatives to receiving the policy proceeds in a lump sum. The policy owner has the right to elect one or more settlement options while the insured is alive. If the insured dies when no election is in effect, the beneficiary may elect a form of settlement.

The fixed period option may be a logical choice if your beneficiary needs temporary security and not a lifetime income if you die. If one or more children are named as the beneficiary, it might be desirable to only provide fiancial assistance until they finish their education, begin their own careers, and attain independence.

The life income option is designed to satisfy an entirely different need-the need for lifetime income. It is frequently elected as the form of payment for a death benefit to a surviving spouse, or for payment of cash values to an insured who lives to retirement age.

The straight life income option continues to pay for as long as the beneficiary lives, but all obligations of the insurnce company end as soon as that person dies. Under this method, a person could die after receiving a single installment, or live far beyond normal- life expectancy and collect many times the amount of premiums paid in.

This option may also be elected with a guaranteed period (also known as a period certain), in which case payments will be guaranteed for a specified period of time even if the payee dies sooner.

Under the interest option, the insurance company holds the entire proceeds and makes period payments of the earned interest only. The interest rate may be flexible but a minimum rate of interest is usually guaranteed in the policy.

This option might be elected if a beneficiary, such as a surviving spouse, was financially secure and had little - need for the proceeds. With the approval of the insurance company, you might specify that the proceeds will be paid to another person (such as surviving children) upon the death of the beneficiary.

Under the fixed amount option, you choose the dollar amount of the benefit payment . This fixed amount will be paid periodically until the entire proceeds are exhausted. Interest, at a minimum guaranteed rate, will be added to the proceeds annually.

A number of miscellaneous provisions apply to settlement of the proceeds. Total proceeds of under $5,000 payable to any one person will be paid as a single sum. If scheduled payments would be less than $ 50, the payment period will be lengthened so that at least $50 will be paid.

The life income or joint and survivor income options apply only if the policy owner is the insured person or a beneficiary who has survived the insured. Proof of age is usually required when a lifetime income will be paid, because age affects the amount of the payments.

Generally, a beneficiary cannot assign installment or interest payments to someone else and may not withdraw proceeds which are to be held by the insurance company under the option selected. However, exceptions may be permitted if requested by the policy owner and agreed to by the insurance company.

Example: If you elect the interest option for payments to a beneficiary; the beneficiary would receive interest only and never have a right to withdraw the principal of his or her benefit. But, if you direct that the beneficiary may be permitted to withdraw a specific dollar amount or percentage of the proceeds for special needs (such as education or purchase of a home) and the company agrees, the beneficiary would be permitted to withdraw some of the proceeds.

Under all options which provide scheduled payments, the benefits may be paid monthly, quarterly, semi-annually, or annually. The fixed period option pays equal installments for a specified number of years-for example, 10 years or 20 years. Amounts to be paid are determined by the number of years selected and interest earnings on the unpaid balance at a rate specified in the policy.

Just about every life insurance policy contains settlement tables, which show dollar amounts per $1,000 of insurance for the option selected. These are simply rows of numbers representing periods of time, adjusted ages of insured people, and benefit amounts. We do not reproduce the tables here, but we will give you some examples.

Example: Under a 20 year fixed period option, the policy would pay a monthly installment of $5.51 per $1,000 of insurance. For a $100,000 policy, this would equal $551 in monthly income, or $6,612 annually, for 20 years.

Accelerated Benefits

If you have a terminal illness, a life insurance policy may be your last substantial source of money. The life insurance benefits may be made available for medical expenses and living expenses prior to death through accelerated benefit provisions or viatical settlement agreements.

Accelerated benefits are insurance company which reduce the remaining death benefit. The government does not currently consider accelerated death payments to be taxable income, and the policy owner can get between 50 and 95 percent of the policy's face value.

Under a viatical settlement, the policy owner sells all rights to the life insurance policy to a viatical settlement company, which advances a percentage (usually 60 percent to 80 percent) of the eventual death benefit. The viatical settlement company then receives the death benefit when the insured person dies. Unlike accelerated benefits, proceeds from viatical settlements are considered taxable income by the government.

Long-Term Care Coverage

Long-term care (LTC) insurance, which reimburses health and social service expenses incurred in a convalescent or nursing home facility, is often marketed as a rider to a life insurance policy. In many respects, this coverage resembles an accelerated benefit.

LTC rider benefits usually include the following provisions:

• elimination periods of 10 to 100 days
• benefit periods of 3 to 5 years or longer
• prior hospitalization of at least three days may be required
• benefits may be triggered by impaired activities of daily living
• levels of covered care iLlclude skilled, intermediate, custodial, and home health In addition, certain optional benefits may also be provided such as adult day care, cost of living protection, hospice care, etc.

The accelerated benefit or living needs clause combines life insurance and LTC benefits, drawing on the life insurance benefits to generate LTC benefits. In a sense, it's like borrowing from the life insurance to pay LTC benefits.

Under the LTC option, up to 70 to 80 percent of the policy's death benefit may be used to offset nursing home expenses. Under the Terminal Illness option, 90 to 95 percent of the death benefit may be used to offset medical expenses. Of course, payment of LTC benefits reduces the face amount of the life policy.

Conclusion

How the proceeds of a the life insurance policy are paid is a common source of litigation. Issues involve everything from the the terms chosen by the policy owner to misstatements made in an insurance application.

In recent years, though, the key issue that has been raised about life insurance proceeds has been making them available to policy owners before insured people die.

This chapter discussed a few of the options you have if an illness occurs-and how benefits can be made available for medical expenses and living expenses prior to death.