Viatical Settlement Tax Reform: Republicans Support Relief, Democrats Divided

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.