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, a viatical settlement is a type of life settlement in which someone with a life-threatening illness sells 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
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. Some examples of these daily activities are 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 a buyer. 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.
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.