What Is the Primary Feature of a Viatical Settlement?

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?

viatical settlement is when an insured person with a life expectancy of two years or less sells their life insurance policy for immediate cash. Someone with a chronic condition who can’t perform two or more activities of daily living can also get a viatical settlement.

The buyer takes on the responsibility of all remaining premium payments. As the new policy owner and beneficiary, the buyer will receive the total death benefit upon the death of the original policyholder.

Key Takeaways

  • A viatical settlement lets you sell your life insurance policy to an investor for immediate cash below its total value.
  • In viatical settlements, the insured usually has a life expectancy of two years or less.
  • The investor covers all remaining premiums on the life insurance policy and is the beneficiary once the original policyholder dies.
  • The difference between a viatical settlement vs. life settlement is that in a viatical settlement, the insured usually has a life expectancy of two years or less. With a life settlement, the insured isn’t terminally ill and has a longer life expectancy.
  • The primary feature of a viatical settlement is that the insured receives cash for their policy without any tax obligation.
  • A viatical settlement can provide funds for medical treatment by selling a life insurance policy, but it may also leave your former beneficiaries without financial support.

Life Settlement vs. Viatical Settlement

In a life settlement, the insured is usually over 65 years old and has a life expectancy of over two years. In a viatical settlement, the insured has a serious illness and a life expectancy of less than two years.

What Are the Benefits of Viatical Settlements?

Viatical settlements offer policyholders quick access to cash. If you get a viatical settlement, you can use the cash for any purpose, but many people use it for:

  • Medical expenses
  • Prescriptions
  • Improving quality of life
  • Experimental treatments that health insurance, Medicaid, or Medicare won’t pay for
  • Moving to be with family
  • Taking more time off work 

Viatical settlements also remove the expense of monthly premiums, which can provide some financial relief.

What Are the Risks of Viatical Settlements?

A viatical settlement is a sensitive transaction. Sellers are typically experiencing challenging times, requiring brokers to handle negotiations with care. This sensitivity is why many states enforce stricter legal regulations on viatical settlements compared to standard life settlements.

For example, model legislation from the National Association of Insurance Commissioners (NAIC), which some state laws have followed, provides the following minimum payouts.

Insured’s Life ExpectancyMinimum Percentage of Face Value Minus Outstanding Loans Received by Viator
Less than 6 months80%
At least 6 but less than 12 months70%
At least 12 but less than 18 months65%
At least 18 but less than 25 months60%
25 months or moreCash surrender value of policy

Viatical settlements are valued differently from life settlements due to lower investment risks. Investors often pay more for policies in viatical settlements because the insured’s shorter expected lifespan means it’s less likely the insured will outlive the projected life expectancy. Some investment entities specialize in viatical settlements, while others focus on standard life settlements due to these different risk profiles.

What Is a Viatical Settlement vs an Advanced Death Benefit?

An advanced death benefit (ADB) involves the insurance company paying out the death benefit early under strict conditions. A viatical settlement involves a third party paying a cash sum under more flexible conditions. 

You can think of a viatical settlement as a third-party ADB. 

Are You Eligible for a Viatical Settlement?

Most life insurance policy types qualify for a viatical settlement, including Whole Life, Universal Life and Term Life insurance. The eligibility criteria relate to life expectancy, health status, and policy value, and in most cases include:

  • A life expectancy of two years or less.
  • A terminal or chronic illness.
  • Policy age of at least two years.
  • Policy value starting at $100,000.

The insured must have a doctor sign off that the insured has a medical condition that is terminal and has a life expectancy of two years or less.

Are There Taxes on Viatical Settlements?

No, there aren’t taxes on viatical settlements. This is because the proceeds of a viatical settlement are considered an advance of your life insurance benefits, which are tax-free.

Understanding the Viatical Settlement Process

Navigating a viatical settlement might seem daunting, but breaking down the steps can demystify the process and make it more manageable. Let’s take a look at what typically happens.

Documentation and Application

To prepare for a viatical settlement, you’ll need documents like medical records to establish health status, financial statements, and insurance information, including a policy illustration. These documents are vital for the viatical settlement provider to evaluate the policyholder’s eligibility and the policy’s value.

Evaluation and Offer

During the evaluation phase, several factors are crucial:

  • Life Expectancy of the Policyholder: Assessed from medical records and health prognosis.
  • Policy’s Face Value: The total amount payable upon the policyholder’s death.
  • Required Premium Payments: The ongoing cost to maintain the policy.

The viatical company’s medical underwriter plays a significant role in determining these factors to ensure a fair valuation of the policy.

Closing and Payment

Once the offer is accepted, the closing process begins. This stage involves:

  • Signing Documents: Legal documents that formalize the transfer of the policy’s ownership.
  • Transfer of Ownership: The viatical settlement company becomes the new policy owner.
  • Disbursement of Funds: The policyholder receives a lump sum payment via escrow, typically within three business days.

Viatical Settlement Companies vs. Brokers

Viatical settlement companies are the companies that buy your policy. Brokers are the people who act as your agent on the viatical market, getting you the highest price.

Look for a buyer (company) that is licensed by the state, bonded, and insured. Additionally, because of the time urgency of a viatical settlement, the company should give you a time estimate for how long the viatical process will take from beginning to end.

If you’re using a broker, look for someone who is licensed, has at least several years of experience, and has a large network of potential buyers. Additionally, the broker should have a clear, compassionate communication style that makes you feel comfortable working with them.

Frequently Asked Questions About Viatical Settlements

What Is a Viatical Settlement?

A viatical settlement is when a terminally ill person sells their life insurance policy.

What is the Payout for a Viatical Settlement?

Usually, viatical settlements sell for 40%-80% of the policy’s face value.

Are Proceeds From a Viatical Settlement Taxable?

No, proceeds from a viatical settlement are not taxable.

What Is the Primary Feature of a Viatical Settlement?

The primary feature of a viatical settlement is that the insured receives cash for their policy without any tax obligation.

Sell your life insurance policy for cash.

See if you qualify now.

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