Viatical Settlements explained
What is a Viatical Settlement?
A viatical settlement is an arrangement where a life insurance policyholder sells their policy to a third-party buyer for an immediate cash payment that can be used while the policyholder is alive. Viatical settlements require the policyholder to have a chronic or terminal illness and meet other requirements related to their policy value and policy type. The payout for a viatical settlement is greater than the policy’s cash surrender value, but less than the death benefit. Following the sale, the buyer assumes responsibility for all premium payments to keep the policy active and collects the death benefit when the insured person passes away.
How Viatical Settlements Work
The process for a viatical settlement is nearly identical to the process for a life settlement, and it includes the following stages:
- Application: You’ll begin by filling out applications for each viatical settlement provider you’re applying to, which involves providing medical records or authorizing the provider to get the information from your insurer and healthcare provider.
- Underwriting: After the provider receives your policy and medical records, they’ll begin evaluating it to verify its accuracy and confirm you qualify for a viatical settlement.
- Offer: If you meet the qualifications, the provider will give you an offer to buy your policy. The offer represents a one-time cash payment, and it is not taxable.
- Negotiation: You can choose to negotiate the offer you receive to see if you can get more money, or seek additional offers from other providers.
- Exchange: After accepting an offer, the buyer will send closing documents for you to fill out. Once complete, your life insurance company will be notified and transfer ownership of the policy to the provider. At this point, you’ll also receive a cash payout for the viatical settlement.
There are three major differences in the process compared to a life settlement:
- Regulations: State regulations for viatical settlements differ than for life settlements, as some states only regulate viatical settlements
- Taxes: Unlike life settlements, viatical settlements are generally not taxable
- Eligibility: Qualifying for a viatical settlement requires the policyholder to have a chronic or terminal illness, but there is no minimum age
Eligibility Factors for a Viatical Settlement
Not everyone with an insurance policy is eligible for a viatical settlement. Certain restrictions apply. Here are the factors that determine if you’re eligible for a viatical settlement.
Policyholder Health
Having a terminal or chronic illness is a requirement to be eligible for a viatical settlement. You will be required to release your medical records to potential purchasers of your life insurance policy so they can verify your health status and life expectancy.
The Age Of The Life Insurance Policy
The settlement provider may require that your life insurance policy has been in force for at least two years. Life insurance policies typically have a two-year contestability period during which the insurance company can investigate whether the policyholder lied on their application and deny payment of the death benefit if so. Some policies also have a suicide clause stating that the policy will not pay out for death by suicide in the first one to two years.
The Value Of The Life Insurance Policy
Depending on what source you consult, you may read that your policy needs to be worth at least $50,000, at least $100,000, or at least $200,000 to be a good candidate for a viatical settlement. Different settlement providers may have different minimums and cases may vary under unique circumstances.
Reasons To Consider A Viatical Settlement
A viatical settlement is not the right choice for every terminally ill or chronically ill life insurance policyholder. The fundamental purpose of life insurance is to provide financial support to one’s beneficiaries, and in many situations, that purpose is still paramount. However, in some situations, the death benefit may no longer be important, and immediate concerns may be more important. Here are common reasons people consider a viatical settlement:
You Need To Cover Urgent Medical Expenses
In the case of a life-changing chronic or terminal illness diagnosis, you may be met with sudden and extremely high medical expenses. If insurance doesn’t cover everything, you’ll either need to pay out of pocket or consider selling assets such as your home. Few people realize their life insurance policy is an asset they can sell, and a viatical settlement enables you to sell your policy to cover unexpected medical expenses without parting with assets. Whether you need a way to fund long-term care or cover treatment costs, you should find out how much your life insurance policy is worth and consider this before parting with other assets.
You’re Unable To Pay The Monthly Insurance Premiums
The monthly premiums on a permanent life insurance policy can be expensive. Indeed, they can become unaffordable for someone who is terminally or chronically ill. Under these circumstances, individuals often face one medical expense after another, and they may also be unable to work and therefore have little to no income.
Also, while many permanent life insurance policies have level premiums that are the same every year, others have modified premiums that increase several years into the policy or as a result of new medical conditions affecting the policyholder’s health. These premiums may be especially challenging to pay given increased medical expenses and decreased income.
If you can’t afford your life insurance policy premiums for whatever reason, a viatical settlement can be a better option than simply letting your policy lapse. You’ll get more than you would by surrendering the policy and you will no longer be responsible for expensive monthly premiums.
Your Term Policy Is Nearing Its Expiration Date
When a term life insurance policy is about to expire, the life insurance company may offer the policyholder the option of converting it to a permanent policy. This option could make sense because someone who is terminally or chronically ill typically will not qualify for a new policy, or if they do, the policy will have significant restrictions. For example, it may not pay a death benefit if the policyholder dies within the first two years, it may have a small death benefit, and the premiums may be costly.
Some people may consider letting their term policy expire rather than converting to a permanent policy because doing so can come with fees and you’ll have to continue paying monthly premiums. However, it’s better to sell your policy through a viatical settlement rather than letting it expire because at least you’ll get some money. You’d receive nothing from letting the policy expire, but selling it through a viatical settlement will award you a lump cash sum. The viatical settlement company will deal with the conversion of the policy including all associated fees and future monthly premiums, so there’s no reason not to sell your policy if you’re considering letting it expire.
You Want To Improve Your Quality Of Life
The money from a viatical settlement can allow chronically or terminally ill individuals to improve their quality of life by alleviating financial stress, paying for better care, providing for niceties, or taking a bucket list trip. For example, the settlement money might allow the policyholder to upgrade to a higher quality long-term care facility. This reason can be especially compelling for policyholders who no longer have a spouse or children who need the death benefit.
Your Beneficiaries Are Financially Independent
The primary purpose of a life insurance policy is to provide financial support for loved ones after your passing, but if your beneficiaries are financially independent you may find they don’t need the money. While money from a death benefit could provide an added layer of comfort for beneficiaries, your current medical needs may be a higher priority. Rather than leaning on loved ones for financial support, a viatical settlement enables you to handle these expenses on your own, and you can still leave any remaining money to beneficiaries.
Pros And Cons Of A Viatical Settlement
Are you trying to decide whether a viatical settlement might be right for you or someone you love? Consider these pros and cons.
Pros
- Cash Payment: Get an immediate lump sum payment that is higher than the policy’s cash surrender value, which can help pay for medical expenses, retirement, or long-term care.
- No More Premiums: Stop paying life insurance premiums. The new owner of your life insurance policy will take over 100% of the premium payments and any other maintenance costs.
Cons
- Medicaid Eligibility: You may lose Medicaid eligibility because Medicaid is a need-based program that depends on your income and assets.
- No Death Benefit: Your beneficiaries won’t receive anything upon your death, although you may choose to give them part of your viatical settlement payout.
Viatical Settlement Examples
For an example of a viatical settlement, consider someone who is diagnosed with a terminal illness and faces high medical bills to cover treatment and medical care. To cover these costs, the individual may decide to sell their life insurance through a viatical settlement.
By doing so, the policyholder will sell their life insurance policy to a third party for a lump cash sum that can be used to cover any expenses, debts, or bucket list items as they see fit. Once the transaction is complete, the third party assumes full responsibility for all monthly premiums and maintenance costs relative to the policy.
Once the original policyholder passes away, the third party collects the death benefit amount from the insurance company.
Another viatical settlement example would be if someone chooses to sell their life insurance policy to pay for assisted living costs following a chronical illness diagnosis. They could have the ability to pay for their assisted living expenses and not have to worry about finances.
With a chronic illness, the individual may be unable to live on their own without help; meaning they may need to hire a caretaker or move to an assisted living facility. The cost of senior care is expensive, ranging from $1,625 to $9,500 a month. The proceeds from the viatical transaction can be used to pay for these expenses.
The viatical sales process may enable the policyholder to upgrade their quality of care or private the option of a private space.
Types Of Viatical Settlements
Terminally Ill Viatical Settlements
Chronically Ill Viatical Settlements
Terminally Ill Viatical Settlements
If a life insurance policyholder has an expected remaining lifespan of 24 months or less, they are considered terminally ill. Advanced heart disease, end-stage kidney disease, and certain stage 4 cancers are examples of terminal illnesses from which an individual is not expected to recover, even with treatment.
Viatical settlements provide an option for people with a terminal illness to cover medical costs and other expenses during their remaining time. Some people may choose to use the money from a viatical settlement to get their affairs in order, while others may want to use the funds to make the most of their remaining time through travel or other activities.
Chronically Ill Viatical Settlements
There are many types of chronic illness, but for the purposes of a viatical settlement, a specific definition of chronic illness applies. It is not enough to have a long-term sickness such as diabetes, heart disease, or rheumatoid arthritis. The chronic illness must be severe enough that the life insurance policyholder cannot perform two or more activities of daily living without substantial help. This is true even if their remaining lifespan is more than 24 months.
The insurance industry defines activities of daily living as:
- Eating
- Bathing
- Toileting
- Continence
- Transferring (for example, getting out of bed)
- Dressing
A policyholder can also be deemed chronically ill if they are severely chronically impaired: for example, if they have advanced Alzheimer’s or dementia. Any of these impairments must be long-term for the definition of chronically ill to apply.
In the case of chronic illnesses, Medicare will not cover long-term care costs and Medicaid has harsh eligibility restrictions, so they should not be relied on. Many people think their only options for paying long-term care expenses are selling their home or leaning on family members for financial support. However, viatical settlements can be used to pay for long-term care costs such as nursing homes, assisted living facilities, or at home health without parting with assets like a home or putting a financial strain on family members.
How Are Viatical Settlement Payouts Determined?
Your policy’s face value, of course, is a big factor in how large your payout from a viatical settlement will be. Recall that your payout will always be less than the policy’s face value but more than its cash surrender value.In addition, your policy’s premiums will affect the payment you receive in a viatical settlement. Because the entity that buys your policy will be paying its premiums, a higher premium will result in a lower settlement.
Life expectancy also plays a key role in determining how much you might receive from a viatical settlement. Viatical settlement providers use your medical information combined with statistical information on other individuals to estimate your remaining life expectancy. The shorter your life expectancy, the larger the payout you can expect.
The type of insurance policy you have, term or permanent, may also affect your viatical settlement payout. The payout on a permanent policy will be higher because a permanent policy remains in force as long as the premiums are paid, meaning the beneficiary is almost certain to receive a death benefit. A term policy could run out before you pass away, meaning the policy would not pay any death benefit. Converting a term policy to a permanent policy could result in a larger payout, though the cost of a conversion must be factored into this decision.
Viatical Settlement Terms and Definitions
Select the term below to see the definition.
There are many types of permanent life insurance, including whole, universal, variable, and variable-universal, and all of them usually have a savings component called “cash value.” Most of each premium payment goes toward providing life insurance coverage, but a small part goes toward the policy’s cash value. Cash value accumulates over time, and the policyholder can borrow this money, use it to pay premiums, or use it to purchase additional insurance. The longer you’ve had a permanent policy, the larger its cash value tends to be.
Cash surrender value is an amount the insurance company will pay a policyholder who relinquishes their policy. Sometimes the cash value and the cash surrender value are the same; other times surrender charges reduce the cash value. Surrender charges do not always apply, especially for policies that have been active for many years.
When you give up your policy in exchange for its cash surrender value, you are no longer insured and your beneficiaries will not receive anything when you die. Instead, you will have a lump sum of cash, but that sum will usually be much less than the policy’s face value (often called the “death benefit”) or what you could potentially receive through a life or viatical settlement.
Viatical Settlement vs Life Settlement
As mentioned earlier, only people diagnosed as terminally or chronically ill are eligible for a viatical settlement, whereas you are not required to be sick for a life settlement.
Life settlements are also sometimes called “senior settlements” because they are usually made to individuals 65 and older. Sometimes the minimum age is 70. Whereas, a viatical settlement is designed to provide a relief option for a person of any age facing extreme medical circumstances as a result of a chronic or terminal illness.
A viatical settlement typically provides policyholders with a significantly higher payout compared to traditional life settlements. This is because the life expectancy of a person seeking a viatical settlement is far shorter, so the third-party buyer will likely incur fewer expenses of maintaining the policy (such as residual premium costs). This also helps the diagnosed policyholder to cover urgent medical expenses that may be significantly higher than someone seeking a life settlement.
With a traditional life settlement, the purchaser of the policyholder’s life insurance policy is not willing to pay as much because of the greater uncertainty over how many years the purchaser will be paying the policy’s premiums for and how long it will be until the purchaser receives the policy’s death benefit.
Unlike life settlement payouts, money received from a viatical settlement is generally not subject to federal income tax. This is because a life insurance policy’s death benefit is usually not taxable, and a viatical settlement’s benefit is considered an advance on the policy’s death benefit. The only exception would be in the case of a chronical illness viatical settlement, where the funds not used to cover long-term care expenses are taxed. Other than that specific case, you get to keep the entire cash payout for a viatical settlement!
By comparison, life settlement proceeds may be more likely to be taxed than viatical settlement proceeds. A life settlement requires you to report the money you receive as income on your next tax return. Because a life settlement may be paid to someone who is not expected to die for a decade or longer, the proceeds may be taxable to the extent they exceed the premiums paid. In other words, if you’ve paid $20,000 in premiums and receive a $50,000 life settlement, you may owe tax on $30,000.
State tax law is often different from federal tax law, and individual circumstances also affect tax liability, so it’s important to talk to a tax consultant or financial advisor before agreeing to a viatical settlement or a life settlement. This should not be considered tax advice.
The viatical sales process may be expedited due to the urgency of the situation, such as an example where someone is facing a terminal illness with a short expected lifespan. In these cases, the policyholder may need money quickly to cover medical expenses. As such, viatical companies (including brokers and providers) will work diligently to help get the policyholder funds fast. While the viatical transaction process length will vary by situation, you may get funds in as little as a few weeks compared to the six to nine months it usually takes for a life settlement.
Alternatives To Viatical Settlements
Life Settlement
Viatical settlements have strict eligibility requirements, so it’s possible you may qualify for a life settlement but not a viatical settlement. As mentioned earlier, the two are similar, but for a life settlement you don’t need to have a chronic or terminal illness. In general, you just need to be at least 65 years old with a permanent or convertible term life insurance policy. If you are eligible for a life settlement, you can go through the same process as a viatical settlement to sell your life insurance for a lump cash sum that can be used as you see fit.
Accelerated Death Benefit (ADB)
An accelerated death benefit (ADB) refers to a rider that is added to your life insurance policy. The ADB enables the policyholder to access a portion of their death benefit from their life insurance while they’re still alive. This money that is paid out while the policyholder is living is later subtracted from the death benefit upon the policyholder’s passing. This may be a useful option under some circumstances, but you may find the Accelerated Death Benefit (ADB) doesn’t provide enough funds to cover all of your urgent expenses.
Policy Loans
Some policyholders may want to explore a policy loan from their life insurance policy. If you have a permanent life insurance policy with a cash value, you may be able to borrow against its value. Although this may seem like a good option, when making this decision, keep in mind that there will be some fees and interest will be added to the original debt. If you are unable for any reason to pay the full amount of the loan back to the company the load was issued from prior to your passing, the remaining loan balance will be subtracted from your death benefit.
Legality Of Viatical Settlements
If you’re familiar with the term “insurable interest,” then you know you can’t normally take out a life insurance policy on another person unless their death would cause you financial loss or another hardship. This is why, typically, you can’t buy a life insurance policy on your elderly neighbor, but a corporation can buy a life insurance policy on its CEO. It might seem like an unrelated third party would not be able to collect on your life insurance policy because they don’t have an insurable interest.
Yet, there’s a legal precedent that makes viatical settlements possible, and it’s more than 100 years old. A 1911 Supreme Court case, Grigsby v. Russell, defined a life insurance policy as property that the policyholder has the right to sell, use as collateral, or borrow against. Your life insurance policy may be one of the largest assets you have, and you have the legal right to sell it through the viatical transaction process if you are eligible and choose to do so. While each state has their own laws regarding viaticals and life settlements, these regulations are typically focused on disclosure requirements to ensure consumers know about these options.
Is a Viatical Settlement Right For You?
For many terminally or chronically ill people, time and money are running out, and a life insurance policy may be their most valuable remaining asset. A viatical settlement can be the best way to secure the financial cushion that would help them improve their quality of life. Though the payout will be smaller than the policy’s face value, it will be larger than the policy’s cash value, making a viatical settlement a superior alternative to letting the policy lapse. In the case of term life insurance policies, you won’t receive any money by letting it expire, so it’s better to sell it and get some money than nothing at all.
If you’d like to learn more about selling your life insurance policy through a viatical settlement, Harbor Life can help. Harbor Life offers a free estimate of your policy’s value and up to 60% of your policy value in cash. While some life settlement companies take as long as six to nine months, Harbor Life will buy your policy in as little as 10 days and pay you within weeks of approval.
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