Viatical Settlement: What it is, How it Works

What Is a Viatical Settlement?

A viatical settlement is an arrangement in which a terminally or chronically ill person sells their life insurance policy at a discount for cash. The seller relinquishes the right to leave the policy’s death benefit to a chosen beneficiary.

The buyer of a viatical settlement pays a lump sum and future premiums on the policy. They become the sole beneficiary and receive the full policy amount when the original owner dies.

Key Takeaways

• A viatical settlement allows the owner of a life insurance policy to sell it at a discount to an investor for a one-time cash sum.
• The insured in a viatical settlement has a life expectancy of two years or less.
• The investor pays all future premiums and becomes the sole beneficiary upon the insured’s death.
• A viatical settlement carries risks as the return on investment depends on when the seller dies.
• A life settlement differs from a viatical settlement in that the insured’s life expectancy is greater than two years.

Understanding a Viatical Settlement

Viatical settlements allow life insurance policy owners to sell their policies, either in part or in full, to investors at a cost lower than the death benefit. The investor’s return depends on the seller’s lifespan. The longer the seller lives, the lower the return, and vice versa.

A viatical settlement provides immediate cash for terminally ill individuals, which can be used to cover care and comfort expenses. It is a financial tool to preserve other assets, such as a home, that the individual does not want to sell before their death.

Criticism of Viatical Settlements

From an investment perspective, viatical settlements can be extremely risky. The return is unknown as it relies on the uncertain timing of the seller’s death. The longer the life expectancy, the cheaper the policy. However, due to the time value of money (TVM), a longer lifespan leads to a lower rate of return.

In many U.S. states, companies that buy viatical settlements for resale to investors are licensed by state insurance commissioners. For more information and a list of state insurance regulators, visit the National Association of Insurance Commissioners (NAIC).

Viatical Settlement vs. Life Settlement

Life insurance policyholders who are not terminally ill may also sell their policies for cash, referred to as a life settlement. In contrast to a viatical settlement, a life settlement involves individuals with a longer life expectancy. Typically, a viatical settlement is for individuals with a life expectancy of two years or less.

If considering a life settlement, policyholders should explore all available options for obtaining the needed cash. They may be able to access the policy’s cash value or use it as loan collateral. An accelerated death benefit is another option that provides a policy holder with a portion of the death benefit before their death.

Special Considerations

Prior to deciding on a viatical or life settlement, there are important factors to consider:

• Obtain quotes from multiple companies to ensure a competitive offer.
• Request an in-force illustration or reprojection for your current policy.
• Be aware of potential taxable income from the sale of a life insurance policy.
• Consider any potential claims on the cash settlement by creditors.
• Understand the implications for public assistance programs such as SNAP or Medicaid.
• Recognize that the buyer of a viatical settlement may check your health condition periodically.
• Answer all application form questions truthfully and thoroughly, especially those about medical history.
• Ensure the viatical settlement provider deposits funds into an independent escrow account for protection during the transfer.
• Inquire about the option to return the money in case of seller’s remorse.