A viatical settlement is an arrangement in which someone with a terminal disease sells his or her life insurance policy at a discount from its face value for ready cash. The buyer cashes in the full amount of the policy when the original owner dies. A viatical settlement is also referred to as a life settlement.
Breaking Down a Viatical Settlement
A viatical settlement is extremely risky. The rate of return is unknown because it's impossible to know when someone will die.
If you invest in a viatical settlement, you are speculating on death. Therefore, the longer the life expectancy, the cheaper the policy. However, because of the time value of money, the longer the person lives, the lower your return. This is undoubtedly one of the more morbid investments someone can buy.
Individuals not facing a health crisis may also choose to sell their life insurance policies to get cash in a viatical settlement. If a life insurance policyholder is considering this option, they should first consider all available options for obtaining the needed cash. There might be a better way to utilize a life insurance policy. For instance, a life insurance policyholder may be able to access some of the cash value to meet their immediate needs while keeping the policy in force for beneficiaries. It might also be possible to use the cash value as security for a loan from a financial institution.
An accelerated death benefit is also an option. An accelerated death benefit usually pays some of a policy’s death benefit before the insured dies. This could provide the needed cash without selling the policy to a third party.
Points to Consider About Viatical Settlements
- It's important to get quotes from several companies to ensure a competitive offer.
- Not all proceeds received from the sale of a life insurance policy are tax-free; make sure you understand all tax implications of a viatical settlement.
- Find out if any creditors could claim your cash settlement.
- Understand the implications on any public assistance that may be relevant, such as food stamps or Medicaid.
- The buyer of a viatical settlement is allowed to check on your health condition periodically. Make sure you understand who will get access to this information.
- All questions on an application form must be answered truthfully and completely—especially questions about medical history.
- Make sure the viatical settlement provider deposits funds into an independent escrow account to protect the funds during the transfer.
- Find out if returning the money is an option in the event of seller's remorse.