According to the 1997 Life Insurance Fact Book, there is $14 trillion worth of life insurance in force. More than three-quarters of all American households own life insurance at an average of $170,900 per family. With the aging of America’s baby boomer population, it seems only logical that many Americans are turning to life insurance to provide financial protection for loved ones should the insured die prematurely. However, while many are using life insurance to provide death benefits for their families, a growing number of people are also finding other uses for life insurance.
Viatical settlements–a viable option?
The Life Insurance Fact Book reports that more life insurance is paid out each year in life benefits than death benefits. Why? Because owners of life insurance are taking advantage of the many options available to them to tap this financial resource as they grow older and the need for the protection afforded by death benefits diminishes over time.
For example, many people approaching retirement choose to convert life insurance policies into an annuity that provides them with additional cash flow. Others discover they can make the largest charitable gifts of their lifetime by utilizing new policies or those that are no longer needed for their original purpose. And in some cases terminally ill individuals have decided to take lifetime settlements of death benefits that would otherwise be received by the policy beneficiary(ies) at their death. These funds can then be used to provide for current financial needs such as medical and living expenses. Such an arrangement is called a viatical settlement.
The growth of viatical settlements in recent years has prompted some people who are not terminally ill to examine their life insurance coverage and ask themselves, “Would a viatical settlement be the right option for me?”
Depending on the circumstances, a life insurance company may pay significantly more than the cash surrender value of a policy under a viatical settlement. Therefore, for individuals with large amounts of unneeded life insurance coverage, a viatical settlement may be a good planning option. Tax consequences of the settlement depend on how long the policy has been held, amount paid for the policy, and other factors.
How nonprofits may benefit
In addition to helping people meet their personal planning goals, viatical settlements, in some cases, may also have philanthropic applications. For example, donors who cash in life insurance policies they no longer need under viatical settlements may increase cash flow and liquidity, which increases their ability to make a charitable gift now or in the future. A donor may also be able to use the proceeds from a viatical settlement to fund a life income gift arrangement such as a charitable gift annuity.
Charitable organizations and institutions may also decide to consider viatical settlements for life insurance policies that donors have already given. This would allow nonprofits to “cash out” on some policies before the cash values and/or death benefits vanish and could help salvage charitable life insurance programs that are floundering.
Creative ideas abound
With trillions of dollars in life insurance already in force, gift planners and other advisors may wish to consider the many ways that this existing pool of insurance can be used to help donors with their giving plans. Viatical settlements are certainly one option to think about. However, keep in mind the other ways donors may give life insurance to benefit your organization, such as gifts of existing policies, gifts via beneficiary designation, donations of life insurance dividends, and wealth replacement gifts. In any event, gift marketing materials should periodically summarize the ways life insurance can be used to make charitable gifts during lifetime or at death that are of a magnitude that may not otherwise be possible.
Additional information is available in the 1997 Life Insurance Fact Book published by The American Council of Life Insurance, 1001 Pennsylvania Avenue, N.W., Washington, D.C. 20004-2599.