Viatical Settlements

Rebecca Parson
Rebecca Parson

Rebecca Parson

Author

Rebecca Parson is a financial and tech writer with 10 years of experience writing about topics such as life insurance, commodities investing, and the SaaS industry. She has a master’s degree from Johns Hopkins University and a bachelor’s degree from the University of Mary Washington. Her writing has appeared at money.com, sacbee.com, cart.com, herodevs.com, blanchardgold.com, and more.

Brian OConnel
Brian OConnel

Brian O'Connel

Contributor

Brian O’Connell has been a contributing writer for U.S News & World Report since 2016. A former Wall Street bond trader and the author of two best-selling books; “The 401k Millionaire” and “CNBC’s Creating Wealth”, he has 20 years experience covering business news and trends, particularly in the business and financial sectors. He believes education is the best gift a financial consumer can receive – and brings that philosophy to every story he writes. His byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, TheStreet.com, Yahoo Finance, CBS Marketwatch, and many more.

By Rebecca Parson, Brian O'Connel
Author, Contributor, Life Insurance

What is a Viatical Settlement?

A viatical settlement is an agreement where a terminally or chronically ill individual decides to sell their life insurance policy at a discounted price in exchange for an immediate cash payout. The seller relinquishes the right to assign the death benefit to their beneficiary. The buyer of the viatical settlement pays the seller a lump sum amount and is responsible for paying all future premiums associated with the life insurance policy. Following the death of the original policy owner, the buyer becomes the sole beneficiary and is entitled to the full death benefit.

4 Important Facts About Viatical Settlements

  • A viatical settlement provides a legal mechanism for terminally ill life insurance policyholders to sell their life insurance policy at a discounted rate to an investor in exchange for an immediate cash payout.
  • The policy seller in a viatical settlement has a projected life expectancy of no more than two years.
  • There are no taxes owed on a viatical settlement. The IRS views it as an advanced death benefit, and none of the proceeds are taxed. Viatical settlements can sell for 75% or 80% of the face value of the policy. 
  • If you have debt, creditors may be able to seize the proceeds of your viatical settlement. This means that if you sell your life insurance policy for a lump sum payment to a viatical settlement provider, the money you receive could be taken by creditors to satisfy any outstanding debts you owe. This is different from life insurance where creditors will not be able to take the death benefit payout for your life insurance policy if the money goes directly to your beneficiaries.

Understanding Viatical Settlements

Viatical settlements offer life insurance policy owners the opportunity to sell their policies to investors. These investors purchase the entire policy or a portion at a price lower than the policy’s death benefit. The timing of the policyholder’s death determines the investor’s return on investment. The return will be lower if the policyholder surpasses their estimated life expectancy. Conversely, the return will be higher if the policyholder passes away sooner than expected.

Individuals in the later stages of a terminal illness can opt for a viatical settlement to get immediate cash that can be used to cover their care and ensure comfort during their remaining days. It serves as a tool that allows individuals to preserve their other financial assets, such as their home, which they may prefer not to sell before their passing.

How is a Viatical Settlement Different from a Life Settlement?

A viatical settlement is a type of life settlement where the insured has a shorter life expectancy. Many life insurance policies are sold as life settlements for individuals with life expectancies of 15 years or more, irrespective of their current health status. On the other hand, viatical settlements only apply to individuals with life expectancies of two years or less. In addition,  there are significant tax benefits associated with a viatical settlement. As the proceeds from the sale are considered an advance on the death benefit, they will not be subject to income tax.

Consider Other Options:

It is important to consider all options before opting for a viatical settlement. For many insureds, an accelerated death benefit (ADB) is also an and may be a better option. An accelerated death benefit usually pays some (up to 50%) of a policy’s death benefit before the insured dies. This benefit could give the life insurance policyholder the cash needed to cover premiums, use it for health care expenses, and leave a large portion of the policy for their beneficiaries. 

Criticism About the Viatical Settlement Market

Many investors and policyholders have been critical of the viatical settlement market. These criticisms stem from concerns over exploiting those in poor health and the potential for fraud.

Exploitation: One concern is that some brokers may take advantage of terminally ill individuals by persuading them to sell their life insurance policies for less than their actual value. This exploitative behavior can result in significant financial losses for the policyholder’s beneficiaries. It is critical to have a financial advisor to discuss all possible options before deciding to sell a life insurance policy.

Fraud: Another concern is the potential for fraud in the viatical settlement market. Due to the large sums of money involved, a few cases of fraudulent activity have occurred. It is essential for individuals considering a viatical settlement to thoroughly research and verify the credibility and track record of any company or broker involved.

Are Viatical Settlements Legal?

Viatical settlements are legally viable options that allow terminally ill individuals to exchange their life insurance policies for a lump sum payout.

But, as with other financial products and procedures, there are state regulations that must be followed. Regulations vary most states have their own regulations as to what qualifies as a viatical settlement and the regulation of viatical settlement brokers of life settlements.

Key Takeaways 

Before deciding whether you should proceed with a viatical settlement, it is crucial to consider several factors carefully:

  • Getting quotes from several buyers ensures you receive the most competitive offer. 
  • The proceeds are tax-free if the policy owner has two or less life expectancy. Your doctor must sign off so you can receive the cash sum without paying any tax.
  • Understand the implications of any public assistance this cash infusion may put at risk, such as Medicare, Medicaid, or SNAP (Supplemental Nutrition Assistance Program). 
  • The buyer of a viatical settlement will have limited power of attorney and can check on your health condition and order medical records periodically.  
  • It is important to ensure the funds are placed in an escrow account to protect the seller during the policy transfer.
  • Find out how long the rescission period lasts. States differ as to the exact number of days a seller has where they can still cancel the life settlement or viatical settlement contract. 

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