A viator is a person who has been diagnosed with a life-threatening illness and decides to sell their life insurance policy so they can receive a portion of their death benefit while they are still alive.
Often, viators are driven by the need to fund costly or experimental therapies that might prolong their lives. When such therapies are not included in their health insurance coverage, selling their policy becomes key to affording these essential treatments out of pocket.
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 policy to a third party that views these policies as investment opportunities.
- The buying counterparty becomes 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 someone insured under a life insurance policy who sells their contract to an external party. This transaction is known as a viatical settlement. The viator receives a portion of the policy’s death benefit while still alive. The proceeds from a viatical settlement are generally tax-free. Upon selling the policy, the viator relinquishes life insurance protection, meaning their heirs will no longer receive the death benefit payout.
Many jurisdictions classify a viator as a person with a terminal or life-threatening illness. Other states allow viators who are not critically ill to sell their policies within specific guidelines.
Reasons for a Viatical Settlement
Viators primarily resort to a settlement to cover healthcare treatment costs. A life insurance policyholder may find their health insurance’s coverage insufficient. For instance, handling an expensive illness might force them to look beyond basic treatment options. They might believe their insurance company overlooks newer or experimental treatments that could alleviate symptoms or extend their lifespan.
In this scenario, the policyholder may prefer to take control of their treatment options, forfeiting their life insurance policy in favor of a lump sum they can use immediately for medical expenses. Viators might be terminally ill (life expectancy less than two years) or critically ill (unable to perform daily living activities).
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. To make a profit, the VSP buys the life insurance policy at a discount, paying the viator less than its face value. A typical viatical settlement fetches around 50% to 70% of the policy’s face value. For example, with a $1 million policy, you would likely receive $500,000 to $700,000 from a viatical settlement.
The VSP is then responsible for making the necessary premium payments for the remainder of the viator’s life. After the viator passes away, the VSP receives the full death benefit of the insurance policy.
Viatical settlements pose risks. A viator may remiss or benefit from an experimental procedure that prolongs their life or cures them completely. In such cases, the VSP may have to continue premium payments for much longer than budgeted, reducing potential profits on the transaction and potentially causing overall losses. To mitigate these risks, some VSPs purchase policies from multiple viators simultaneously to ensure claims are staggered, thereby managing their risks through diversification.
Real-World Example of a Viator
Ted Smith was recently informed that his cancer prognosis had worsened, giving him only six months to live. Years ago, Ted took out a life insurance policy to ensure his family would be provided for if anything happened to him. Over the years, Ted’s business and investments flourished, making him financially secure, which meant his family would not need the life insurance payout for financial stability after his passing.
With this financial confidence, Ted opts for an experimental procedure with promising success rates for cancers like his. However, his medical insurance provider refuses to cover this expensive new treatment. Consequently, Ted decides to sell his life insurance policy and become a viator.
Ted finds a viatical settlement provider. They negotiate a settlement: as the policy’s original death benefit beneficiary, Ted’s wife would have received $500,000 upon his death. Now, Ted is selling the policy to the VSP for $250,000. Ted receives around 50% of the benefit’s face value, and the VSP expects to profit $250,000, adjusted for the premiums paid until Ted’s death.
Fortunately, the treatment works, and Ted’s cancer goes into remission. As a result, the VSP must continue making monthly premium payments on the policy for potentially many years, reducing its estimated profit margin.
What Types of Life Insurance Can Be Sold by Viators?
VSPs purchase virtually any policy type, including term, whole life, or universal. Given the terminal illnesses often involved, VSPs are even willing to buy temporary term life insurance policies.
How Much Do VSPs Pay for a Policy?
The typical payout for a viator ranges between 50% to 70% of the face value of the policy. The primary determining factor is the viator’s life expectancy.
How Do I Find a Viatical Settlement Provider?
Check with your state’s insurance regulator for an approved list of VSPs. Many states maintain lists of active VSPs on their websites. Your life insurance company might also have a roster of VSPs with whom they frequently work.
The Bottom Line
Viators are generally people facing life-threatening conditions who sell their life insurance policies to afford expensive medical treatments. If you’re contemplating a viatical settlement, consider all your options before making a decision to ensure the best possible outcome. Assess whether your heirs can manage without the life insurance payout to guarantee financial stability for loved ones in the future.
Related Terms: life insurance, death benefit, lump sum, viatical settlement provider, face value, beneficiary
References
- Harbor Life Settlements. “Viatical Settlements and Taxation”.
- New York State Department of Financial Services. “Viatical Settlement, Definition of ‘Viator’.”
- Illinois Department of Insurance. “Viatical Settlements, Accelerated Death Benefits.”
- Coventry Direct. “Viatical Settlements Explained.”
- Life Settlement Advisors. “Life Settlement vs. Viatical Settlement”.
- State of Maine Bureau of Insurance. “Viatical/Life Settlements.”
- Illinois Department of Insurance. “Viatical Settlements, Accelerated Death Benefits.”
