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Are Accelerated Death Benefits a Good
Backstop for Uninsured Health Care Costs?
At one point, the buzzword was "viatical
settlements," a practice of selling one's active life
insurance policy to a company that would pay the insured the
estimated present value of the death benefit so uninsured
healthcare costs and related expenses could be paid. Such
settlements grew in popularity during the 1980s AIDS crisis,
when insured individuals, mostly young men at the time,
desperately needed funds for what was at the time an almost
guaranteed death sentence. That business eventually attracted
some unscrupulous dealers.
Today, with healthcare costs rising with the number of
uninsured Americans from all walks of life, the new buzzword is
"accelerated death benefits" — riders on life
insurance policies that allow an individual who is terminally
ill or facing significant long-term care costs to draw down a
portion of the death benefit to pay for those expenses.
It's a tantalizing option for people who fear their own
personal health insurance won't pay for health care costs in
their old age, but it's worth studying these riders and whether
there are better options to cover the cost of care. A Certified
Financial Planner™ professional can help you review the
options that fit you best. Here are some basics:
An accelerated death benefit is an extra. If you're buying
life insurance, an accelerated death benefit is an extra feature
you buy on that coverage — it's not included. It will definitely
raise the cost of your life insurance.
What commonly triggers an accelerated death benefit? On most
policies that feature this rider, these four situations will
commonly trigger the payment of at least a portion of the death
benefit:
- The diagnosis of a terminal, chronic or specific
physical illness where death is likely within a set period of
time;
- The diagnosis of certain catastrophic illnesses
requiring extraordinary medical treatment;
- Permanent nursing
home confinement.
Most riders are activated by a catastrophic disease such as
heart attack, stroke, coronary artery bypass surgery, kidney
failure, or life-threatening cancer. It's particularly rare for
this coverage to pay for an organ transplant, AIDS or
paraplegia. It's particularly important to check on what's not
covered.
Wouldn't long-term care insurance be a better
investment? Possibly. No one can know what their afflictions
might be 10, 20 or 30 years from now, but a discussion with
one's doctor, a financial planner, and maybe a look back at
family health history can be a worthwhile exercise in thinking
about what total healthcare costs can be and whether a long-term
care insurance policy (optimally bought as close to the age of
50 as possible) can provide more financial security.
What are the tax issues? Since life insurance proceeds are
generally not subject to tax for beneficiaries, accelerated
death benefits aren't either — but it pays to check with a tax
professional to see if this is the case for you.
March 2008 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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