My client is given six months to live. They then decide to accelerate the entire Death Benefit to look for a cure in the Himalayan mountains. A 100-year-old Yogi living in a remote cave gives them some herbs and miraculously, they recover.
A) Can the carrier come after my client to pay back the Death Benefit?
B) Are there any tax consequences?
First, these are gray areas that are very tough to get answers for. No carrier that you discuss this with would give you a “this is what would happen” kind of answer and obviously they would all refuse to be quoted. Likewise, Algren is in no position to give concrete answers, however, what we can tell you is this:
A) Generally speaking it is very hard for any sophisticated corporation to recoup losses from the unsophisticated public for a multitude of reasons that we will not delve into.
In addition, we see that many Accelerated Death Benefit Riders will provide funds for organ transplants that would save lives. While this is a lesser known fact it does lead us to believe that carriers have considered that the acceleration of funds could save a life and they are willing to part with a partial or total Death Benefit in that scenario.
B) If you thought Part A was obscure, Part B makes it look like a 70″ 4K TV. Why is that? Everyone’s favorite three letters, IRS.
Taking the above scenario where an organ transplant saved the life of an insured; the entire Death Benefit was accelerated yet only a portion paid for medical expenses. Assuming the medical expenses were non-taxable would any excess be taxable?
Our source tells us that this question would require a “Re-Characterization” of the funds as taxable. While it is highly unlikely that this would occur, our source also informed us that they did not believe this has been tested in court.
Bonus Tidbit: Our source also told us that they do not believe Death Benefits paid to insureds over age 100 have been tested in court as non-taxable yet.