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Accelerated Death Benefits Under Life Insurance Contracts

(Title III, Subtitle D)

Effective date: January 1, 1997 (for amounts received after December 31, 1996, unless noted otherwise).

For life insurance company tax purposes

  • The law provides that a life insurance contract is treated as including a reference to a qualified accelerated death benefit rider to a life insurance contract (except in a case of any rider that is treated as a long-term care insurance contract).
  • Includes accelerated death benefit provisions for amounts received under life insurance contracts by individuals who are terminally ill or chronically ill.

Tax treatment

  • Provides an exclusion from gross income as an amount paid by reason of the death of an insured for:
    • Amounts received under a life insurance contract; and
    • Amount received for the sale or assignment of a life insurance contract to a qualified viatical settlement provider.
  • The exclusion for amounts received under a life insurance contract on the life of an insured who is chronically ill applies if the amount is received under a rider or other provision of the contract that is treated as a long-term care insurance contract under the new law.
  • The provision does not apply in the case of an amount paid to any taxpayer other than the insured, if such taxpayer has an insurable interest by reason of the insured being a director, officer or employee of the taxpayer, or by reason of the insured being financially interested in any trade or business carried on by the taxpayer.

Definition of a terminally ill individual

  • One who has been certified by a physician as having an illness or physical condition that reasonably can be expected to result in death within 24 months of the date of certification. (A physician is defined for this purpose in the same manner as under the Long-Term Care Insurance section.)

Definition of a chronically ill individual

  • The definition and the per diem amounts received with respect to a chronically ill individual are under the Long-Term Care Insurance section.

Definition of viatical settlement provider

  • Is any person regularly engaged in the trade or business of purchasing or taking assignments of life insurance contracts on the lives of insured individuals who are terminally ill or chronically ill, so long as the viatical settlement provider meets certain requirements. The viatical settlement provider must either:
    • Be licensed in the state where the insured resides, to engage in such transaction with terminally ill individuals, or
    • If such licensing with respect to the insured individual is not required in the state, meet other requirements depending on whether the insured is terminally or chronically ill:
      • If the insured is terminally ill, the viatical settlement provider must meet the requirements of §8 and §9 of the NAIC Viatical Settlements Model Act, relating to disclosure and general rules and to standards for evaluation of reasonable payments, including discount rates, in determining amounts paid by the viatical settlement provider.
      • If the insured is chronically ill, the viatical settlement provider must meet requirements similar to those of §8 and §9 of the NIAC Viatical Settlements Model Act, and also must meet the standards, if any, promulgated by the NAIC for evaluation the reasonableness of amounts paid in viatical settlement transactions with chronically ill individuals.

[3103 Summary Index]


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