When facing a diagnosis of an advanced-stage illness such as a late-stage cancer or a neurological condition, one of the many challenges is a financial one: how will my family and I cover the medical costs associated with treatment (as well as the non-treatment expenses that we’re sure to face)? With cancer drug costs more than doubling in the past decade – and treatment and care sometimes requiring the patient to resign from their job – it’s no surprise that cancer patients today are 2.5 times more likely to file for bankruptcy.
The key to handling the financial challenges of chronic or terminal illnesses may lie in an asset that many people have, but aren’t aware that they can turn into usable funds for treatment or even living expenses: their life insurance policies.
Fifth Season Financial has assembled a guide to leveraging life insurance policies, both through traditional viatical settlements and life settlements – typically referred to as selling a life insurance policy – and receiving an advance with a life insurance loan through Fifth Season’s FLAG (Funds for Living and Giving) Program, which is an alternative to viaticals in which the patient doesn’t sell their life insurance policy.
Life settlements involve the outright sale of a life insurance policy from the insured to a third-party investor for a one-time, lump sum payment. A viatical settlement is a type of life settlement that has a more specific qualifier. Only policyholders who are terminally or seriously ill qualify for viatical settlements, while senior life settlements are available to a larger category of consumers (usually older) who wish to sell their policies. Common reasons people opt into a senior life settlement include no longer needing or wanting a life insurance policy, paying for retirement, a desire to purchase a different kind of life insurance policy, or an inability to afford premium payments. Reasons for a viatical settlement may include paying for medical expenses, compensating for reduced working abilities, or generally improving quality of life during or after treatment.
A viatical settlement offers the benefit of a lump sum payment – typically, 20-70% of the policy’s face value – which is significantly higher than what the life insurance company itself would offer if the policy holder chose to surrender the policy. With cash value life insurance policies, the insured accumulates cash and dividend values, which they can access upon surrender of the policy, but that amount tends to be significantly lower than what a viatical settlement offers.
Term and group policies generally do not accumulate cash value, which means that upon a policy surrender to the life insurance company no funds would be available to the insured. A viatical settlement focuses not on surrender value but on the intrinsic value of the policy, taking into account the insured’s current medical status. Therefore, even where there is no surrender value, a viatical settlement can provide a lump sum cash payment. Families can use this money to cover medical costs, pay off debts, and ensure quality of life.
Life settlements including viatical settlements do have their disadvantages, which may not be suited towards you and your family’s needs. Some considerations that may impact your decision are:
• These sales are non-reversible; the transaction is complete once the policyholder receives their funds and there’s no way to get the life insurance policy back if their needs or medical status change. As a sale, optionality is significantly reduced (there is no ability to reverse the transaction or seek additional funds from the policy).
Fees and Tax Events
• These sales also include significant transaction and service fees up-front (which are built into the offer but never fully revealed) and unless the insured person’s life expectancy is less than two years, a portion of the sale proceeds are taxed as either ordinary income or capital gains (or both in some cases), so there can be a noticeable reduction in take-home funds.
Lack of Privacy for Personal Information
• Viatical settlements also allow for a wider exposure of personal information. Although the policyholder may only speak to a single life insurance agent, the sale process can involve dozens of other life settlement providers, medical personnel, and investment groups. During the insured person’s lifetime, their policy may be sold multiple times, with new companies regularly contacting the patient and their family members for updates about their personal, financial, and health records.
Forfeiture of All Money for Your Beneficiaries
• The last disadvantage (and perhaps the most important one to consider if you have a family that relies on your income) is that because a viatical settlement is the sale of a life insurance policy, there is no benefit upon the patient’s death. In addition, if the individual passes away earlier than expected, the policy holder’s family could be left with significantly less funds overall.
The FLAG Program offers the benefits of receiving a cash advance on the face value of one’s life insurance policy without having to surrender or sell the policy. Structured like a loan advance, the FLAG program offers a tax-free way to leverage your life insurance and may be appropriate for patients facing a diagnosis of an advanced stage illness (such as a neurocognitive disorder like ALS or a later stage cancer).
Like a life insurance policy sale, the FLAG program offers an immediate lump sum, but unlike a life settlement, the policy and the death benefit stays in place. There are no restrictions on the use of these funds: they can be used to cover medical expenses, reduce debt, cover home expenses, take a trip together with family, and more.
But unlike a traditional policy sale, the FLAG program typically provides not just one, but two payouts: one to the policyholder immediately and the other to the policy’s beneficiaries upon the policyholder’s passing. That is why it is Funds for Living and Giving – funds to ensure quality of life now, while still leaving a legacy for family members.
Unlike a traditional life insurance policy sale, all associated fees with the FLAG program are paid later, out of the policy’s death benefit, and funds from the advanced payment are typically non-taxable, so there are absolutely no out-of-pocket payments on the transaction. Fifth Season also assumes all future premium payments on the life insurance policy, which reduces a family’s financial burdens.
Thanks to the medical expertise of Fifth Season’s underwriters, over 90% of FLAG advances to date have left surplus funds for beneficiaries to receive. In those cases where the policyholder far exceeds their life expectancy and the advance exceeds the account’s balance, Fifth Season never holds the policy’s beneficiaries financially responsible.
Beneficiary Payouts & Overall Greater Value
• Because the FLAG program leaves funds for payment to beneficiaries, the initial payment is naturally somewhat smaller than the lump sum granted in a viatical or life settlement. However, the total funds secured through the FLAG Program’s two payments are typically greater than a policy sale: While a viatical or life settlement may provide 20-70% of a policy’s face value, Fifth Season’s total payments (combining the initial advance, premium payments and surplus funds) have, on average for cases concluded to date, exceeded 80% of the policies’ face value.
Optionality & Flexibility
• While the permanence of a viatical sale is a risk, Fifth Season’s FLAG Program is a more flexible approach. Because each insured person maintains control of their policies, they retain the option to repay the advances at any time and restore full policy benefits – or, if their medical situation changes, they may be able to secure additional advances from Fifth Season.
Speed & Privacy
• Because the FLAG Program involves only Fifth Season’s team of medical and financial experts – rather than the slew of external brokers typically involved in a policy’s sale – each patient’s personal, financial, and health records remain secure and protected. The process is also much faster than a traditional policy sale; while it typically takes 3 – 6 months before viatical settlement funds are available, the FLAG Program usually generates funds as quickly as 4 – 6 weeks.
If the flexibility and transparency that the FLAG Program offers seems like a good fit for you and your family, talk to your financial advisor or contact Fifth Season Financial today. Fifth Season has distributed over $90 million to help clients fight the financial toxicity of an advanced-stage diagnosis, and we look forward to speaking with you at 866-459-1271 or at email@example.com.
Relieve financial stress with the FLAG Program, a viatical alternative that uses your life insurance for a cash advance