What Is a Viatical Settlement?

Are you curious about viatical settlements? A viatical settlement is a financial tool designed to help people benefit from their life insurance policies during times of need. Here’s what you need to know about how they work:

What is it?

In a viatical settlement, a person sells their life insurance policy to a third party financial institution for more than its cash value but less than the final death benefit.

While general life insurance sales can happen for many reasons, a viatical settlement specifically refers to a sale that takes place because the seller has becoming chronically or terminally sick.

How does it work?

Once they have sold their life insurance policy, the seller does not need to make payments on it any longer. They get a cash payment bigger than the surrender value of their life insurance policy, and the third party buyer pays the premiums and eventually collects benefits.

Viatical settlements exist to give terminally and chronically ill people a way to get access to cash quickly to pay for medical bills, funeral expenses, or just to enjoy life a bit more. Viatical settlements typically pay out more than ordinary life insurance settlements.

Who is eligible?

A person is considered terminally ill if medical professionals give them 24 months or less to live. To be chronically ill, a person must generally be unable to do at least two of the following for themselves:

  • Eat
  • Bathe
  • Dress
  • Relieve themselves

Every state has its own laws about what exactly constitutes a chronic illness. A person can also be considered chronically ill if they need regular supervision in order to stay safe and healthy. To be eligible as either terminally or chronically ill, a person needs a doctor’s official verification note detailing the nature of their illness.

Policy eligibility

Even if a person is chronically or terminally ill, they can only get a viatical settlement if their life insurance policy is also eligible for such a settlement. Three types of insurance policies are eligible:

  • Universal life insurance
  • Whole life insurance
  • Term life insurance

Whatever type of policy a person has, the policy needs to have a face value of at least $50,000.

Deciding on a price

In a viatical settlement, the size of the policy’s death benefit, the type of policy, the expected costs of continued premium payments, and the life expectancy of the seller all get taken into account when the buyer and seller decide on a price.

To make a final decision, the buyer needs to have all medical records ready, and they need an underwriting so they can make a good estimate of life expectancy. This way, they can see if they’ll get enough of a return to make it worth their while.

Making a decision

So, is a viatical settlement the right choice for you? Here are some things that might make it worth considering:

You aren’t worried about income loss: If you don’t need to worry about your dependents needing money after your death, it could make sense for you to sell a policy and make good use of the money.

You can’t afford the premiums: If you let a life insurance policy lapse, you’ll lose everything you put into it. If you find that medical expenses are eating away at your finances and making it impossible to keep up with payments, it makes sense to sell early and get something back.

The policy is about to expire: If you have a term life policy that is about to expire and you have a terminal illness, it’s unlikely that you’ll be able to replace it. In that case, it makes sense to convert your term policy to a permanent one and then settle.

You want to enjoy your final days: Sometimes a terminal illness diagnosis comes along very unexpectedly. If you’re faced with a limited future and a limited income, it could make sense for you to sell your policy and use that money to make the most of your final days with friends and family.

You got a life insurance policy because of the benefits it offers, and there is more than one way to take advantage of those benefits. A viatical settlement could be a great way to make your policy work for you.

Photo by NCinDC