What Is a Viatical Settlement?
Let me explain what a viatical settlement is. It's an arrangement where you, if you're terminally or chronically ill, can sell your life insurance policy at a discount from its face value to get ready cash right away. In return for that cash, you give up the right to leave the policy's death benefit to a beneficiary you choose.
The buyer in this setup pays you a lump sum and takes over all future premiums on the policy. They become the sole beneficiary and collect the full policy amount when you pass away.
Understanding a Viatical Settlement
Viatical settlements let you, as the owner of a life insurance policy, sell it to investors. They buy the whole policy or part of it for less than the death benefit. The return for the investor hinges on when you die—their rate of return drops if you live longer than expected, but it increases if you die sooner.
If you're terminally ill, this can give you immediate cash for care and comfort in your final days. It's a way to manage finances and preserve other assets in your estate, like your home, without selling them before you die.
Criticism of Viatical Settlements
From an investment standpoint, viatical settlements are highly risky. You can't predict the rate of return because no one knows exactly when someone will die. Investing in one means you're essentially betting on death. The longer the expected life, the cheaper the policy, but due to the time value of money, a longer life means a lower return for you as the investor.
Keep in mind that in many U.S. states, companies buying viatical settlements for resale to investors must be licensed by state insurance commissioners. For details and a list of regulators, check the National Association of Insurance Commissioners (NAIC).
Viatical Settlement vs. Life Settlement
If you're not facing a health crisis but still want to sell your life insurance for cash, that's usually called a life settlement. The main difference is your life expectancy—in a viatical settlement, it's generally two years or less, while life settlements are for those expected to live longer.
Before going for a life settlement, consider other options for getting cash. You might access the policy's cash value to meet needs while keeping it active for beneficiaries. Or use that cash value as collateral for a loan from a bank.
Another choice is an accelerated death benefit, which pays out part of the death benefit before you die, giving you cash without selling to a third party.
Special Considerations
- Get quotes from several companies to ensure you receive a competitive offer.
- Request an in-force illustration or reprojection for your current policy.
- Not all proceeds from selling a life insurance policy may be tax-free; understand the tax implications before signing a contract.
- Find out if any creditors could claim your cash settlement.
- Understand how this affects any public assistance you receive, such as SNAP or Medicaid.
- The buyer can check on your health periodically; know who will access that information.
- Answer all application questions truthfully and completely, especially about medical history.
- Ensure the provider uses an independent escrow account to protect funds during transfer.
- Check if you can return the money if you change your mind after the sale.
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