A viatical settlement presents a unique financial solution for those who are terminally or chronically ill by allowing them to sell their life insurance policy at a discount for immediate cash. The seller forfeits the policy’s death benefit in exchange for early funds to cover significant expenses.
In this arrangement, the buyer provides a lump sum payment and assumes the responsibility for any remaining premiums. Upon the seller’s death, the buyer collects the full death benefit as the sole beneficiary.
Key Highlights
- Immediate Cash Relief: Viatical settlements provide the terminally ill with a lump sum cash payment in exchange for their life insurance policy, offering a way to cover financial needs during their final days.
- Eligibility Requirements: This settlement is typically available to individuals with a life expectancy of two years or less.
- Investor Commitments: The investor bears the cost of future premiums and collects the policy’s death benefit upon the insured’s demise.
- Inherent Risks: The unpredictable nature of life expectancy introduces significant investment risks, as returns may vary based on the seller’s longevity.
- Comparison: Distinguished from life settlements, this arrangement caters to those with shorter life expectancies, providing a distinct financial planning mechanism.
Understanding Viatical Settlements
Viatical settlements allow individuals to liquidate their life insurance policies, unlocking a portion of its death benefit while still alive. Investors purchase these policies at values lower than the future death benefit. The investment’s return rate is contingent upon the seller’s lifespan, with earlier-than-expected deaths yielding higher returns and longer lifespans diminishing them.
For terminally ill individuals, this transaction grants immediate financial assistance, covering medical bills and contributing to a more comfortable end-of-life experience. Utilizing a viatical settlement can preserve other valuable assets in an estate, such as a home, maintaining an optimal financial structure until death.
Criticisms and Risks
From an investment perspective, viatical settlements carry substantial risk due to the unforeseeable nature of human lifespan. The profitability of such investments hinges on the timing of the insured’s death - longer life spans reduce the return on investment dramatically.
Additionally, purchasing entities for these settlements must often hold licensure from state insurance commissioners, ensuring a regulated environment for investors. Comprehensive reviews and adherence to meticulous screening are advised due to the speculative nature of the endeavor.
Viatical Settlements vs. Life Settlements
An alternative to viatical settlements for those not imminently facing fatal conditions is the life settlement. Here, life insurance policies are sold by individuals with a greater-than-two-year life expectancy, thereby differentiating this financial avenue from viatical settlements. Before opting for a life settlement, policyholders should explore all avenues for generating the needed cash to ensure the most advantageous outcome.
For instance, policyholders may be able to harness some policy cash value to fulfill immediate needs without selling it, or use the cash value as collateral for loans from financial institutions. Moreover, exploring an accelerated death benefit might be beneficial, as this allows part of the death benefit to be claimed before death without relinquishing ownership to third parties.
Thoughtful Considerations
Several critical factors need assessing before committing to either a viatical or life settlement:
- Competitive Offers: Seek quotes from multiple providers for the best financial offer.
- Policy Insights: Request an in-force illustration or an updated policy projection.
- Tax Implications: Understand the tax treatment of proceeds since they are not always tax-free.
- Creditor Claims: Assess whether your cash settlement is protected from creditors’ claims.
- Impact on Assistance: Evaluate potential effects on public assistance programs, such as Medicaid or SNAP.
- Health Privacy: Be aware that periodic health status updates may be required by the buyer.
- Application Honesty: Respond accurately and completely to all medical history queries in the application.
- Escrow Securing: Ensure that settlement funds are placed in an independent escrow account for maximum safeguard.
- Refund Options: Check if reversing the settlement is possible in cases of seller’s remorse.
By approaching viatical settlements with a comprehensive understanding, one can better navigate the options to suit both immediate financial needs and long-term strategic planning.
Related Terms: life settlement, life insurance, accelerated death benefit, escrow account, Medicaid.
