Viator: What It Is, How It Works, Example

What Is a Viator?

A viator is a person diagnosed with a life-threatening illness who sells their life insurance policy to receive a portion of their death benefit while alive.

Viators sell their policies to fund costly or experimental therapies that could prolong their life. If these therapies are not covered by their health insurance, they may need to sell their policy to afford the treatments.

Key Takeaways

• A viator is a life insurance policyholder who sells their policy to receive money while alive.
• Viators are typically people with life-threatening illnesses who need money to fund medical treatment.
• A viator sells the life insurance to a third-party buyer as an investment.
• The buyer is responsible for paying the monthly premiums associated with the policy.
• In exchange, the buyer receives the policy’s full death benefit once the viator passes away.

Understanding Viators

A viator is a person insured under a life insurance policy who sells their contract to an outside party. This transaction is known as a viatical settlement. The viator receives a percentage of the policy’s death benefit while still alive. The proceeds from a viatical settlement are tax-free. After selling the policy, the viator gives up life insurance protection, and their heirs will no longer receive a death benefit payout.

Many jurisdictions define a viator as a person with a terminal or life-threatening illness. Some states allow viators who are not seriously ill to sell their policies within specific guidelines.

Reasons for a Viatical Settlement

Viators often turn to a settlement to pay for healthcare treatments. A life insurance policyholder may not be satisfied with the coverage they receive from their health insurance provider. For example, a person with an expensive illness may feel their provider only covers basic treatment options. They may believe the insurer is failing to take advantage of newer or more experimental treatments that could reduce their symptoms or extend their lifespan.

In this situation, the policyholder may wish to take their treatment options into their own hands. They forfeit their life insurance policy in favor of a lump sum they can use for their medical expenses. Viators may be terminally ill (life expectancy less than two years) or critically ill (unable to perform typical functions of daily living).

Viatical Settlement Providers

To complete a sale, viators need to find a counterparty, known as a viatical settlement provider (VSP), willing to purchase their life insurance policy. The VSP purchases the policy at a discount, paying the viator less than its face value. The typical viatical settlement is around 50% to 70% of the death benefit. If you have a $1 million policy, you would likely receive $500,000 to $700,000 for a viatical settlement.

The VSP is then responsible for making the policy’s premium payments for the viator’s life. When the viator dies, the VSP receives the full death benefit of the insurance policy.

Viatical settlements are not without risk for investors. If a viator goes into remission or benefits from an experimental procedure that prolongs their life or cures them completely, the VSP may be responsible for more premium payments than anticipated, reducing their profit on the transaction or causing an overall loss. To mitigate this risk, some VSPs purchase policies from multiple viators at once to have policies paying out at different times.

Real World Example of a Viator

Ted Smith was told that his cancer prognosis has worsened, and he has only six months to live. When Ted’s children were younger, he took out a life insurance policy to provide for his family if something should happen to him. Over the years, his business and investments did well, and he saved up a substantial amount. Now financially secure, his family will not need a life insurance payout after his death.

Keeping this in mind, Ted decides to try an experimental procedure he heard has great success in curing cancers like his. However, his medical insurance provider refuses to cover the expensive new procedure. Ted chooses to sell his life insurance policy and become a viator.

Ted finds a viatical settlement provider, and they negotiate a settlement on the policy. As the policy’s beneficiary, Ted’s wife would have received a $500,000 payout upon his death. Ted sells the policy to the VSP for $250,000, receiving approximately 50% of the original payout, and the VSP makes a profit of $250,000, minus any monthly premiums until Ted’s death.

Fortunately, the treatment Ted undergoes works, and his cancer goes into remission. The VSP is now responsible for the monthly premium payments on the policy for the remainder of Ted’s life, reducing its estimated profit.

What types of life insurance can be sold by viators?

VSPs buy virtually any type of policy, including term, whole life, or universal. Since viators are terminally ill, VSPs are willing to buy even temporary term life insurance policies.

How much do VSPs pay for a policy?

The typical payout for a viator ranges from 50% to 70% of the face amount. The main variable in the calculation is your life expectancy.

How do I find a viatical settlement provider?

Check with your state’s insurance regulator to find an approved VSP. Many states keep a list of active VSPs on their websites. Your life insurance company may also have a list of VSPs they work with regularly.

The Bottom Line

Viators are often people with life-threatening illnesses who sell their life insurance policies to pay for expensive medical treatments. If you are considering a viatical settlement, consider all your options to ensure the best outcome. Also, consider whether your heirs can manage without the death benefit payout from your life insurance.