Key Takeaways
- Terminally ill sell life insurance for cash.
- Buyer assumes premiums, collects death benefit.
- Proceeds often tax-free if eligibility met.
- Immediate funds for medical or living costs.
What is Viatical Settlement?
A viatical settlement is a financial transaction where a person with a terminal or chronic illness sells their life insurance policy to a third party for immediate cash, typically less than the policy's full face value but more than its cash surrender amount. The buyer assumes ownership, pays future premiums, and collects the death benefit upon the policyholder's death.
This option provides liquidity for medical or living expenses without taking loans, distinguishing it from other forms of insurance settlements.
Key Characteristics
Viatical settlements have distinct features that set them apart from other life insurance transactions:
- Seller Eligibility: The policyholder, or viator, must be terminally ill with a life expectancy of 24 months or less or chronically ill, as certified by a physician.
- Third-Party Buyer: Licensed viatical settlement providers purchase policies and manage premium payments after sale.
- Tax Treatment: Proceeds may be tax-free federally when conditions are met, differentiating viatical settlements from standard life settlements.
- Policy Ownership: Typically, the viator must own the policy; group policies often require conversion before sale.
- Risk Transfer: The buyer assumes the risk of the insured’s lifespan and premium obligations until death.
How It Works
The process begins when you submit your life insurance policy and medical documentation to a licensed viatical settlement provider or broker. They evaluate your policy’s face value, your health status, and expected life expectancy to generate an offer, often between 50-80% of the death benefit for terminal cases.
Once you accept the offer, ownership and beneficiary rights transfer to the buyer, who then pays the premiums and collects the death benefit upon your passing. The transaction can take 2 to 4 weeks, with brokers often shopping multiple offers to maximize your payout.
Examples and Use Cases
Viatical settlements serve as a valuable financial tool for individuals facing severe health challenges who need immediate funds:
- Terminal Illness: A patient with advanced cancer sells a $500,000 policy for $300,000 to cover medical expenses, while the buyer assumes future premiums.
- Chronic Conditions: Someone diagnosed with ALS might use proceeds from a viatical settlement to pay for home care and equipment.
- Investor Interest: Certain companies like Prudential may be involved in purchasing or managing life insurance assets related to settlements.
- Healthcare Sector Impact: The funds from settlements may indirectly support services highlighted in best healthcare stocks through increased patient liquidity.
Important Considerations
Before pursuing a viatical settlement, understand that selling your policy is irreversible and your beneficiaries will no longer receive death benefits. Ensure the provider is licensed and reputable to avoid fraud or unfair offers.
Review the contract carefully, particularly ownership and resale clauses, and consider state regulations, which vary and may be detailed by organizations like the NAIC. Comparing offers and consulting professionals can help you maximize benefits while minimizing risks.
Final Words
Viatical settlements provide a way to access significant cash from a life insurance policy when facing a terminal or chronic illness, often at a rate above the policy’s cash surrender value. To maximize your benefit, compare offers from multiple licensed providers and consult a financial professional before proceeding.
Frequently Asked Questions
A viatical settlement is a financial transaction where a person with a terminal or chronic illness sells their life insurance policy to a third party for immediate cash, typically less than the policy’s death benefit but more than its cash surrender value.
To qualify, the policy owner, called the viator, must be terminally ill with a life expectancy of 24 months or less, or chronically ill with a condition severely impacting daily living, depending on state rules.
The viator submits policy details and medical records to a licensed provider or broker, who evaluates and offers a price based on the policy’s value and the viator’s health. Once accepted, ownership transfers to the provider, who pays a lump sum and then covers premiums until the policy pays out at death.
Generally, proceeds are federal income tax-free if the viator is terminally ill or chronically ill and uses funds for medical care. However, tax rules can vary by state, so consulting a tax professional is recommended.
Viatical settlements provide immediate cash to cover medical bills or living expenses, usually offer more money than surrendering the policy to the insurer, and may offer tax advantages for eligible sellers.
Selling your policy means losing the death benefit for your beneficiaries, and the sale is irreversible. Also, the payout is typically less than the full death benefit, so it’s important to weigh immediate needs against long-term impacts.
The process usually takes between 2 to 4 weeks, during which brokers may obtain multiple offers to ensure the viator receives the best possible price.
Viatical settlements are for terminally or chronically ill individuals with shorter life expectancies, while life settlements involve policy owners who are generally older but not terminally ill, and life settlement proceeds may be taxable.
