A viatical settlement is when a chronically or terminally ill person decides to sell their life insurance policy to a third party in exchange for a lump-sum payment that is less than their death benefit. Before getting deep into whether or not viatical settlements are something you should consider, let’s review the basics.
What is a viatical settlement?
As previously mentioned, viatical settlements allow terminally ill persons to sell their life insurance policy for cash. Viatical settlements are non-taxable and aim to allow patients to fund their treatment plan.
They differ from a conventional life insurance settlement in a few key ways.
- They are tax-free.
- They typically pay more than conventional life settlements
- They do not require a permanent policy (Permanent policy examples are whole life insurance or universal life insurance).
Types of viatical settlements
There are two types of viatical settlements: chronically ill and terminally ill.
A chronically ill person is defined as someone who is unable to fulfill at least two activities of daily living for at least 90 days. Ethical considerations of the terminally ill patient include: bathing, eating, using the toilet, or getting dressed.
They also require a high level of supervision to protect themselves against health or safety hazards.
A terminally ill person is defined as someone that has a disease or condition that cannot be cured and will likely lead to the affected person’s death.
Some common examples of terminal illnesses are advanced cancer, advanced heart disease, dementia, Alzheimer’s, and Parkinson’s.
How it works
In a viatical settlement, the insurance policyholder sells ownership of said insurance policy to either a viatical settlement broker or viatical settlement company. The buyer then assumes the responsibility of paying for the policy premium and will receive the death benefit when the original policyholder passes away.
Terms to know
To fully understand how these types of settlements work, there are some terms you need to learn to fully understand.
Cash surrender value is the cash value of your policy minus any fees. This option means that you will cancel your life policy and will no longer be covered by your life insurance policy.
Face value is the amount of money the death benefit payout your beneficiaries would receive once you pass away.
Eligibility
Three factors to consider when considering a viatical settlement is eligibility:
- The life insurance policy must have a face value of at least $200,000.
- The policy must be at least 2 years old.
- The person seeking a viatical settlement must be clinically proven to be terminally ill or chronically ill.
How viatical settlements payouts are determined
The payout is determined by the monetary value of the death benefit and how long you are expected to live. Typically, the longer you’re expected to live, the lower the payout.
Is a viatical settlement right for you?
Viatical settlements could be relevant mainly for these reasons:
- You may need cash to cover medical costs.
- You need to cover other expenses.
- If your term policy is about to expire (once it expires you not get any cash payout).
If you think that this is an option for you, start getting a quote and get more information here.
