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AIDS Treatment News
Viatical Settlement Tax Reform: Republicans Support
Bob Roehr and John S. James
March 3, 1995
AIDS TREATMENT NEWS #218, March 3, 1995

One provision of the Republican Contract with America could benefit persons with AIDS -- tax relief on the money received from a life insurance policy before death, by a person with a short life expectancy due to illness. Under current law, death benefits paid by life-insurance companies are not taxable. Or if the policyholder borrows from family or friends and in turn assigns them as beneficiary of the policy, that too is not taxable. But if the policyholder gets the benefit of the policy before death by either an "accelerated benefit" provision of the policy itself, or a "viatical settlement" program, then that money is treated like regular income and is taxable.

Reformers see that it is obviously wrong to take money from a person with a terminal illness, who is likely to need it for emergency medical and living expenses while they are alive, when the same money would be tax free if it went to their estate after death. Some jurisdictions, including the states of California, New York, and New York City, have already enacted laws to exempt from local taxation payouts under both accelerated benefits and viatication. A legislative priority of the National Association of People with AIDS (NAPWA) is to similarly reform the Federal law.

To understand the current effort to reform Federal tax law you need to know the difference between "accelerated benefits" and "viatical settlement." Accelerated benefits -- a provision of a small but growing number of insurance policies -- allows for pre-payment of a portion of the death benefit in advance of death. Terms and conditions are set by the insurance policy and are generally quite restrictive, available only in the very last stages of illness.

Many people with AIDS find their financial needs occur earlier, often soon after they take medical retirement, to pay private health insurance premiums, medical co-payments, and other expenditures necessary for their well-being. The concept of viatical settlements evolved to meet these earlier financial needs of people with AIDS. Their development has also stimulated increased availability of and more generous terms in accelerated benefits.

A viatical settlement is the purchase of a life insurance policy by an independent company. The policyholder in return names the purchaser as irrevocable beneficiary of the policy being purchased. Because only one company issues a particular life insurance policy but many companies are willing to purchase it, viatication offers a much greater choice of financial options.

Most policies can be sold through the viatication process. However, certain new individual policies not past their period of contestability, some group policies, and policies written by financially shaky insurance companies may not meet the criteria for purchase by a viatical settlement company.

House Republicans have introduced an appropriate reform bill (HR 8, the Senior Citizens' Equity Act) as part of their Contract with America; it includes tax relief for both accelerated benefits and viatical settlements. Everyone agrees that accelerated benefits should not be taxed; the controversy is over whether to extend the same tax treatment to viatical settlements. The Republicans on the House Ways and Means Committee, which is considering the bill now, are generally supportive of not taxing viatical settlements.

But Democrats are divided; at hearings on January 19, Barbara Kennelly (D-Connecticut) supported tax exemptions for accelerated benefits, but strongly attacked the same treatment for viatical settlements. She reiterated that position in a letter published in the February 8 edition of the WASHINGTON POST. Many of the country's largest insurance companies are based in her district; unequal tax treatment would allow insurance companies to sell accelerated benefits on terms that policy holders would not have chosen if they had the option of viatical settlement with equal tax treatment. (Since most policies do not offer accelerated benefits on any terms, the practical result would to continue the present system -- those needing early access to life- insurance money could get it tax free if they could borrow from rich relatives or friends, but would be taxed otherwise.) Letters and calls to Congress are needed now -- especially to Democrats on the House Committee on Ways and Means, and especially from voters in their districts, or at least from their states. Some of them already support tax reform for both viatical settlements and accelerated benefits, but their support may not be secure. Tell them that viatical settlements, as well as accelerated benefits, should not be taxed. Write or call to: Sam Gibbons (D-FL), Ben Cardin (D- MD), William Coyne (D-PA), Harold Ford (D-TN), Andrew Jacobs (D-IN), Gerald Kleczka (D-WI), Barbara Kennelly (D-CT), Sander Levin (D-MI), Robert Matsui (D-CA), Jim McDermott (D- WA), Richard Neal (D-MA), Lewis Payne (D-VA), Charles Rangel (D-NY), and Pete Stark (D-CA). You can write to them at: The Honorable __, House Committee on Ways and Means, 1102 Longworth House Office Building, Washington, DC 20515; you can call them through the Capital Switchboard, 202/224-3121.

For more information about this issue, call Gary Rose, National Association of People with AIDS, 202/898-0414, or Tom McCormack, Affording Care, 202/479-2543.

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