A viatical settlement is an arrangement for you to sell your life insurance policy at a discount to its face value for cash today. They are generally used by those who are terminally or chronically ill to get cash to pay for end of life care.
The seller of the life insurance policy gives up any right to the policy’s death benefit in exchange for the cash. This means when you die, the money goes to the company that purchased your policy and there is nothing left for any beneficiaries.
The buyer of the viatical settlement will pay out a lump sum today and assumes the payment of any future premiums for the policy. In exchange, the buyer receives the death benefit upon your death, (ie- the buyer is the new beneficiary).
Learn more about Viatical Settlements and if they may be right for you.
Key Takeaways:
- In a viatical settlement, you sell your life insurance policy to a company in exchange for cash today.
- The company takes over all the remaining premium payments and gets the death benefit upon your death.
- In a viatical settlement, your current beneficiary no longer gets any benefit when you die.
- Viatical settlements may make sense if you need cash for end-of-life care and/or have no surviving beneficiaries you want to cover.
- The cash you receive will be less than the face amount of the policy. The discount is based on your expected remaining life, the policy cash value, future expected premiums, and current market rates.
What is a Viatical Settlement?
If you get diagnosed with a terminal illness or a chronical illness and have less than 2 years of life expectancy, you may be able to sell your life insurance for cash.
Viatical settlements allow the owner of a life insurance policy to sell it to investors. The investor will typically buy the full policy, but sometimes it can be for a portion of the policy.
Typically you will receive 50-70% of the face amount in cash for a viatical settlement. For example, if the viator (person selling the life insurance has a $500,000 policy, they will get $250-$350,000 in a settlement.
Viatical Settlement Benefit To the Investor
In order to get a return on their investment, the investor will pay less than the full death benefit amount. Usually this is 50-70% of the death benefit.
If the life insurance seller lives longer than expected, the investor will see a lower return on their invested. But if the seller lives shorter than expected, the return will be higher.
The investor takes over paying premiums on the policy. Since the investor wants to maximize their return, they will pay the lowest premium they can to keep the policy active. This super-efficient behavior is to the detriment of the insurance company who issued the policy.
Viatical Settlement Benefit to the Seller
The seller of the viatical settlement is typically someone who is terminally ill. By selling their life insurance policy, they receive immediate cash that they can use to pay for end of life care and comfort.
A viatical settlement can be a useful tool for an individual who wants to preserve their current living condition and pay for care.
Downsides of Viatical Settlements
Viatical settlements come with a host of negatives.
From the investor’s perspective, a viatical settlement can be very risky. It is extremely difficult to know when a person will die. A viatical settlement investment is a speculation on death and the return on the investment will be variable. The longer a seller is expected to live, the lower the cash payout an investor will be willing to make. This is due to the time value of money which states a dollar today is more valuable than a dollar at some point in the future.
The seller of the policy forfeits all claims to the death benefit in exchange for cash today. Often the payout is 50%-70% of the policy face amount.
Viatical Settlement vs Life Settlement
Life settlements are closely related to viatical settlements. A life settlement also allows you to sell your life insurance policy for cash, but, the seller isn’t facing a known health crises. This means in a life settlement, the seller has a longer life expectancy than 2 years that is typically used for viatical settlements, and gets a relatively smaller cash payout.
If you are considering a life settlement, you should first look at other ways to get liquidity from your life insurance policy. For example, you could withdraw your life insurance cash value and keep the policy inforce. Although, lowering your cash value likely increases your future premiums.
There are also life insurance riders you may select on your life insurance policy that can provide liquidity.
A common rider is the accelerated death benefit (ADB) rider which allows you to access your death benefit for qualified expenses while still living.
Things to Consider Before a Viatical Settlement
Selling your life insurance as part of a viatical settlement is a big decision. Here are some important things to consider before selling your policy:
- Get an in-force illustration projection for your current policy. Depending on markets and your behavior over time, your cash value and future payments on a permanent life insurance policy will change from your as-sold illustration.
- Find out if creditors have outstanding claims against your estate. A viatical settlement may allow them to make a claim on your policy while most life insurance benefits are protected from creditors.
- Get quotes from several viatical settlement companies to find the most competitive offer.
- The proceeds from a viatical settlement may be taxable. Ensure you understand any and all tax implications before selling your policy.
- Viatical settlements may impact any public assistance you receive like Medicaid or the Supplemental Nutrition Assistance Program (SNAP).
- You must answer all the questions on your viatical settlement application truthfully and fully or the contract may be voided.
- Understand your viatical settlement contract. For example, some contracts allow for a return of the money under certain conditions.
- The investor may be allowed to pull your medical records periodically, so understand when and who gets access to your information.
If you only have 1 life insurance policy, you would be leaving your loved ones without any benefit upon your death.
The Final Word
Viatical settlements can be helpful if you are:
- Diagnosed with a terminal or chronic disease
- Have a life insurance policy
- Need the money for end-of-life care and
- Don’t want or need to leave a benefit to a beneficiary
You can use the lump sum payment to maintain your standard of living and pay for end-of-life care.
Frequently Asked Questions (FAQs):
A viatical settlement is when you sell a life insurance policy for a lump sum payment. You need to be terminally or chronically ill and have less than 2 years of expected life.
In general, if the cash received from the buyer is less than the total premiums paid by the seller, you may be able to avoid taxes on the sale of the policy. However, work with your tax advisor to ensure you understand all the tax impacts of your specific situation.
This is a tough question only you can answer. Common reasons for viatical settlements are:
1) Getting treatment for a life-ending illness
2) Using hospice or in-home care
3) Paying off medical bills or other debt
4) Getting additional treatments not covered by insurance
5) Disburse to family