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Viatical Loans Overview: Definition, Pros/Cons, Alternatives

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    A viatical loan is a strategy to pull cash from your life insurance policy after you’ve been diagnosed with a terminal illness. It’s similar to a viatical settlement in three respects. One, viatical loans and viatical settlements are structured around an in-force life insurance policy. Two, you qualify for both a viatical loan and viatical settlement when a qualified medical professional certifies that your lifespan is 24 months or less. And lastly, you can use the proceeds from a viatical loan or viatical settlement to cover your medical expenses and end-of-life care.

    Beyond those similarities, though, viatical loans and viatical settlements are fundamentally different transactions. But because they share a similar name and both involve life insurance, they are often confused with one another. This guide to viatical loans should clear up that confusion, and also share the information you need to decide if a viatical loan (or viatical settlement) is right for you. Read on for a comprehensive overview of viatical loans, including eligibility requirements and how viatical loans compare to viatical settlements.  

    What is a Viatical Loan?

    A viatical loan is a cash advance on your life insurance, available only to policyholders with a terminal medical diagnosis. You will pay interest and fees on the amount advanced to you, and the lender will collect its repayment from the death benefit on your life insurance. 

    How Do Viatical Loans Work?

    Viatical loans work differently than traditional loans. Importantly, your credit history, financial health, and employment status are not qualification factors. As well, you don’t request a specific loan amount. Your lender assigns an adjuster who offers a loan amount after reviewing your policy and health details. That loan amount may be anywhere from 30% to 70% of your policy’s face value, depending on your health and exact diagnosis, along with the estimated future premium payments required on the policy. Your viatical lender accounts for those premium payments by reducing the loan amount. After the loan is funded, the lender makes the premium payments to ensure the policy remains in force.

    As part of the application process, you will provide access to your medical records. Your adjuster will share that information with multiple life expectancy underwriters, who will confirm your diagnosis and estimate your lifespan. Some viatical loan companies may even have their own physicians and terminal disease specialists who will also review and weigh in on your condition.  

    If you agree to the loan terms, you’ll assign your death benefit to the lender through your insurance provider. You will not have to make any loan repayments while you are living. After you are gone, the lender collects the death benefit, repays your loan including any outstanding interest and fees, and sends the remaining funds to your beneficiaries. 

    Eligibility Requirements for Viatical Loans

    Viatical loans are not standardized, so eligibility requirements vary from lender to lender. Generally, the factors that affect your eligibility for a viatical loan include the policy details, such as face value, age, and type of life insurance, along with your health and life expectancy. Viatical lenders prefer a face value of $50,000 or more and expected lifespan of 24 months or less. 

    Differences Between a Viatical Loan and Viatical Settlement

    The differences between a viatical loan and viatical settlement have to do with the timing and amount of cash you receive. A viatical loan provides a smaller amount of cash upfront and leaves some of the death benefit available for your beneficiaries. A viatical settlement provides more cash upfront to you but leaves no death benefit for your beneficiaries. Your choice between one and the other usually comes down to how concerned you are about running out of money. 

    If you’re worried a viatical loan won’t provide enough cash, a viatical settlement may be the right move. You could always keep the funds in an account with a named beneficiary. That way, any money leftover can pass seamlessly to your loved ones. Be sure to check with your tax advisor before proceeding on this strategy, however, since there may be tax implications

    Pros and Cons of a Viatical Loan

    Viatical loans have some advantages as well as notable drawbacks.

    Pros of Viatical Loans

    1. Your beneficiary will receive a death benefit. When you initiate the loan, your lender can estimate the funds available to your beneficiaries after loan repayment. Know that this is only an estimate, though. The actual amount could be more or less, depending on how long you live after the loan is funded.
    2. Viatical loans have no upfront costs. You don’t pay out of pocket for your viatical loan. The lender takes its fees and interest on the loan either from the loan amount or the death benefit when you pass.

    Cons of Viatical Loans

    1. You don’t have flexibility on the loan amount, and it may be less than you need. As noted above, it’s your viatical lender and not you who sets the loan amount. That loan amount does not consider your projected medical expenses so you may not get as much money as you need to pay for all of your necessary expenses. 
    2. The lender charges interest and fees on your loan and takes these amounts from your death benefit. A viatical loan may have a higher interest rate than other sources of debt, such as a reverse mortgage, home equity loan, or viatical settlement which does not have any interest at all.   

    Alternatives to Viatical Loans

    A viatical loan can generate the cash you need for medical bills, but it’s not the right solution for every situation. Before proceeding with a viatical loan, evaluate your other options as well — if only to have additional reference points to compare. The factors to review include the amount of cash available, the costs, whether or not you have to make future premium payments, and the impact to the death benefit your beneficiaries will receive. 

    You should also consult with your financial and tax advisors to help you compare these options. Based on your financial situation, there may be tax or other financial consequences that should play into your decision.  

    If you have a permanent life insurance policy, compare the outcomes of a cash-value loan and a viatical settlement before you agree to a viatical loan. A cash-value loan is an advance against your cash-value balance. This will reduce your death benefit, but it’s likely to be cheaper, faster, and easier than a viatical loan. The drawback is it may only provide a smaller amount of cash.  

    A viatical settlement will produce a larger amount of cash than either the viatical loan or the cash-value loan. You can validate this by contacting the Harbor Life Settlements team for a free estimate of your policy’s value

    Whatever method you choose to liquidate your life insurance, you need to know you’ll have enough cash on hand to cover those medical bills and fund your end-of-life care — without having to ask your family members for help. If you’re not sure which option is right for you and would like more information regarding viatical settlements, contact us and we’ll guide you through the process while answering your questions.

    Catherine Brock

    Catherine Brock

    Catherine Brock is a personal finance writer who's been featured in The Motley Fool, Refinery29, Wellness.com and has made appearances on ABC7 Chicago, FOX2News St. Louis, KCAL9 Los Angeles, Fox19 Cincinnati, WGN TV Chicago and WCPO TV Cincinnati. When she's not writing, she can be found riding a horse in the country or shopping online for clothes.

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