What Is a Viatical Settlement?
Viatical settlements can be an efficient way for terminally ill individuals to raise much-needed cash, using life insurance policies that no longer offer the same utility they once did.
Thomas J. Brock, CFA®, CPAInvestment, Corporate Finance and Accounting ProfessionalThomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.
If you’re a terminally ill adult who is struggling to pay current medical bills or get the care you need, you may qualify for a viatical settlement by selling your life insurance policy to receive immediate financial aid.
Like other life insurance settlements, these settlements are typically provided by companies. While exact options vary by state, the process is fairly simple. The policyholder sells their life insurance policy to the company or provider. In exchange, the seller receives an immediate lump sum of cash.
Who Qualifies for a Viatical Settlement?
To qualify for a viatical settlement, you typically must be terminally or chronically ill. This usually means that you have under two years left to live.
If you are not terminally ill but still want to sell your life insurance, you may be eligible for a life settlement.
Your life insurance policy may also require a value of a certain amount to qualify for a viatical settlement. The lump sum you receive will always be less than the death benefit, since the goal of the company or entity purchasing the policy is to make profit.
So, there may not be a motivation for a company to buy your policy if the value is too small or if high premiums negate the potential payout.
How Much Is Paid Out in a Viatical Settlement?
Payouts for a viatical settlement can vary heavily. Every life insurance policy is different, and there is no set amount for each one that would be paid out.
What Determines a Viatical Settlement Payout?
- Life expectancy
- Value of the policy
- Premiums and expenses
The amount of your actual payout will depend on a few different factors. Life expectancy plays a huge role, and you may see a higher payout the shorter your life expectancy is.
The value of the policy also plays a big role, as well as the cost of maintaining and paying any premiums after the policy has been purchased.
Are Viatical Settlements Legal?
Viatical settlements are legal and are a viable way for someone who is terminally ill to essentially swap their life insurance policy for a lump sum payout.
But, as with other financial products and procedures, there are rules and regulations that must be followed. Regulations can vary across the country and each state typically has a list of the viatical settlement companies that they regulate.
How Does a Viatical Settlement Work?
The model of how a viatical settlement works is straightforward. Say that you are terminally ill with a life expectancy of 18 months or so.
If you do not have family that will receive the death benefit of your life insurance policy, or if you need the money now to pay for expenses, then you may want to sell your life insurance policy.
A company that is interested in the policy will purchase it from you, providing a significant lump sum of cash in return. You now no longer own the policy, and your beneficiaries are no longer entitled to the death benefit.
That death benefit now goes to the company that purchased the policy. The idea is that, when you die, the company will make a profit since the death benefit exceeds the lump sum payout you were given.
However, it is a risk for companies because your life expectancy directly factors into how much the company will make. In turn, this may affect your payout. For example, if you dramatically outlive your life expectancy, then the company could possibly lose money if it must continue to pay premiums on the policy.
What Are the Types of Viatical Settlements?
There are a couple different types of conditions that could qualify you for a viatical settlement. Remember that if you are healthy and want to sell your life insurance, then you would need to look into a life settlement instead.
Terminally Ill
The first type of viatical settlement is for someone who is terminally ill. This usually means that you have less than two years to live.
If that is the case, then you should be eligible to sell your life insurance and receive a viatical settlement. A doctor or physician may have to certify your terminal illness.
Chronically Ill
You could be eligible for a viatical settlement if you are chronically ill, but it is a little more complex. According to the Illinois Department of Insurance, to qualify as chronically ill, it must be verified that you cannot perform several daily-living activities on your own, such as eating or bathing.
You could also be considered chronically ill if you require supervision because of cognitive impairment. Exact rules and qualifications may vary by state.
Pros and Cons of Viatical Settlements
The primary advantage of opting for a viatical settlement is simple: you receive immediate cash. This can be especially critical if you are facing medical bills or other significant expenses due to your terminal condition.
Another pro of viatical settlements is evident if you have no beneficiary or close family member for your death benefit. If there isn’t somewhere meaningful for that money to go, then you can benefit by getting some of it while you are still alive.
But there are cons to consider as well when looking into viatical settlements. Perhaps the most overt one is that your family will not receive any kind of death benefit when you die.
If you had kept your life insurance policy, your beneficiary would’ve received a benefit worth more than the lump sum that you sold your policy for.
According to the North Carolina Department of Insurance, you also run the risk of potentially creating a tax event when you accept the lump sum. You may end up owing taxes on that amount.
You should also consider that your life expectancy is exactly that — something that is expected. You could significantly outlive it or die earlier. This may impact the decision you would have made, so be sure to think through all scenarios before deciding.
What Companies Issue Viatical Settlements?
Guidelines for viatical settlements and the companies that regulate them can vary by state. States typically provide a list of which companies are regulated to sell viatical settlements within that region.
There can be a lot of variation. For example, according to the Washington State Department of Financial Institutions, there are no viatical settlement companies registered to sell viatical settlements in Washington.
You should avoid any potential providers who are not legitimate or are not registered or regulated by the state that you are in.
Alternatives to Viatical Settlements
There are some potential alternatives to viatical settlements if you need immediate cash. One easy option to look into is whether your policy has the option for an accelerated death benefit.
According to the Maine Bureau of Insurance, an accelerated death benefit results in some or all of the death benefit of a life insurance policy being paid out before you die. This is a beneficial option because it keeps you from involving a viatical company and losing value of the total death benefit.
The Maine Bureau of Insurance also stated that some life insurance policies can include terminal illness riders. That means, if you are diagnosed with a terminal illness, you can be eligible to receive the death benefit.
According to the North Carolina Department of Insurance, it is also worth checking to see if your life insurance policy has any cash value or non-forfeiture benefits before opting for a viatical settlement.
Is a Viatical Settlement Right for Me?
Whether a viatical settlement is right for you depends both on your personal circumstances and what matters the most to you. If you have a terminal illness and are struggling to pay medical bills or can’t afford the cost of care, then a viatical settlement may make sense for you.
It will offer you access to immediate cash in exchange for your policy. But the trade off is that the lump sum you are given will likely be significantly less than your death benefit, and your family or beneficiaries will not receive anything when you pass away.
If you are not terminally or chronically ill, then a viatical settlement does not make sense for you and you are likely not eligible for one.
A viatical settlement may also not be right for you if you have another option of getting cash without selling your policy. It’s important to do your due diligence and consider all options before opting for a viatical settlement.
Frequently Asked Questions
A viatical settlement agreement is when someone who is terminally ill sells their life insurance policy to a company or provider in exchange for a lump sum payout. The provider then owns the policy and will receive the death benefit when the seller dies.
In a viatical settlement agreement, the viator is the person who is selling their life insurance policy to a company in exchange for a lump sum. They are typically terminally ill.
A viatical settlement is meant for sellers who are terminally or chronically ill and have a short life expectancy. A life settlement refers to when someone, usually a senior who is healthy, wants to sell their life insurance policy.
Viatical settlements are typically not taxed, but this could vary from case to case.
Regulated companies and providers can invest in viatical settlements. Regulated companies may vary by state.
