- Viatical Settlements FAQ -
Everything You Need to Know About Viatical Settlements
A viatical settlement is the sale of a life insurance policy when the insured policyholder is terminally or chronically ill. The insured receives a cash payment from the third-party buyer in an amount greater than the policy’s cash value, but less than the death benefit. After the viatical settlement closes, the buyer accepts all responsibility for the insurance premiums and assumes all rights to the death benefit.
There are two types of viatical settlements, and these are differentiated by whether the insured is terminally ill or chronically ill. The distinction between the two mainly involves how the life insurance policy is valued, since the lifespan of a chronically ill insured is more uncertain than that of a terminally ill insured.
A terminally ill insured has a life expectancy of two years or less.
A chronically ill insured is unable to perform two or more ADLs or activities of daily living. ADLs are basic self-care tasks involving personal hygiene, continence management, dressing, eating, and walking independently.
A viatical settlement specifically involves the sale of life insurance where the policyowner is terminally or chronically ill. A life settlement, on the other hand, is the sale of life insurance to a third party when the insured does not have a terminal or chronic diagnosis. Life settlements are only available to insureds who are at least 65 years old, but the insured’s age is less relevant in a viatical settlement.
Learn more about the differences here.
You’d qualify for a viatical settlement if you have an active life insurance policy that’s at least two years old, and you’ve been diagnosed with a chronic condition or end-stage disease.
A viatical settlement is worth considering if you are facing financial stress from healthcare costs and lifestyle changes associated with a terminal or chronic health issue. The settlement can alleviate some of that stress by generating cash proceeds and eliminating your responsibility to pay those life insurance premiums.
These benefits come with a trade-off, however. Once the viatical settlement is complete, your loved ones will no longer receive that death benefit. If you and your family can accept that trade-off, then a viatical settlement is an appropriate financial strategy for you to pursue.
A viatical settlement isn’t the only way to raise funds from your life insurance. You could also surrender your life insurance back to the carrier. Or, depending on your policy, you could borrow against your cash value, or opt for an accelerated death benefit. Your best option among these strategies depends on your goal.
Life insurance surrender
Surrendering your life insurance is usually the least attractive option. As with a viatical settlement, you give up your coverage and you no longer have premiums. But the cash you’d raise by surrendering is less than what you’d generate with a viatical settlement.
A cash-value loan keeps your life insurance intact but reduces your death benefit. You do have to keep paying your full premiums, plus interest on the loan. You can only borrow up to the amount of cash value that’s accumulated in your policy. This might be the right approach if you want to keep your death benefit whole, the accumulated cash value is enough to cover your needs, and you can keep paying your premiums.
Accelerated death benefit
An accelerated death benefit is a feature that allows you to cash out part of your death benefit while you are living. Let’s say you have a $500,000 policy and you want to accelerate $300,000 of it. Your insurer will make you an offer, which will be some amount less than the $300,000 benefit you are accelerating. Accept the offer and the insurer pays you the agreed-upon amount in cash. Thereafter, you would pay premiums for the portion of the death benefit you did not accelerate, which is $200,000 in our example. Note that not all policies have this feature.
If your policy does offer an accelerated death benefit, weigh your options carefully. As shown in the table below, an accelerated death benefit reduces your death benefit and your premiums, while generating a high cash payout. By comparison, a viatical settlement may generate a lower cash payout, but it eliminates your premiums and your death benefit.
|Transaction Type||Your Death Benefit||Your Premiums||Cash Payout|
|Accelerated death benefit||Reduced||Reduced||Higher|
A viatical settlement does end with you receiving a lumpsum cash payment, which is generally a good thing. But a sudden influx of cash may make you ineligible for certain benefits you receive based on financial status. For example, your settlement could affect your eligibility for Medicaid or food stamps.
Also, the cash you receive will not be protected from your creditors. Cash value within your life insurance is either partially or fully exempt from debtors, depending on the laws in your state. But when you convert that policy into cash-in-hand by way of a viatical settlement, those protections are no longer in place.
Your settlement payout is a function of the policy’s death benefit and your life expectancy. A shorter life expectancy generally means a higher payout. This is because potential buyers quantify their expected returns based on how long they’ll need to hold the policy and how much they’ll invest in future premiums.
Nearly any type of life insurance qualifies for a viatical settlement, but some are more appealing to buyers than others. Individual whole life insurance policies are normally the easiest to sell. Group policies from an employer can be sold as long as a settlement is not prohibited by the policy terms, and only if the insured is no longer employed. Term life is sellable, too, particularly when the policy is convertible to permanent life or is still within the level-term period.
You can sell your life insurance directly to a viatical settlement company and pay no fees. Or, you can work with a broker who markets your policy to multiple buyers to get the highest price. A broker will charge a commission, but those fees are deducted from the transaction proceeds.
This is a challenging time for you, and it’s normal to feel uncertain about how to proceed with your life insurance. Rest assured, you can change your mind at any time during the viatical settlement process. You might only go as far as getting an estimate on your policy, or you might have already received a winning offer after a competitive bid process. Either way, you’re not obligated to follow through with the settlement.
It’s natural to feel some uncertainty about sharing your medical information. Here’s what you can expect. Your health records are necessary to market and sell your policy, so you will be asked to sign a medical release. Your private information is only shared with those who are directly participating in the transaction, such as your broker and prospective buyers. As well, buyers may periodically request an update on your health status.
The funds generated from your viatical settlement are typically not taxable. The Health Insurance Portability and Accountability Act, known as HIPAA, exempted viatical settlements from federal taxation in 1996. Because every situation is unique, verify with your tax advisor that a viatical settlement wouldn’t have unintended federal or state tax consequences.
Once your viatical settlement closes and you receive the funds, there is a limited window in which you can change your mind and roll back the transaction. This window is called a rescission period, and its length is defined by the laws in your state. Generally, you should have about two weeks from the date you received the sale proceeds to change your mind. After the rescission period closes, the transaction is final and cannot be undone.
Harbor Life Settlements is a viatical settlement and life settlement company. We match you, the policyowner, with a premier broker and oversee the settlement process. Our goal is to ensure you generate as much cash as possible from the sale of your life insurance.
We manage viatical settlements for policyholders like you. That starts with answering your questions about the process. We also review your information and provide feedback on the marketability of your policy. Once you’re ready to move forward, we present your policy to our exclusive broker partner Suncrest Benefits. Suncrest Benefits will market the policy to multiple premier buyers in a competitive auction. When the auction closes, we review the winning bid with you.
Harbor Life Settlements offers premier, hands-on service along with the quickest settlement process in the industry. Our broker partner Harbor Life Brokerage has built its own technology to streamline the settlement bidding process; that, along with our deep expertise in underwriting, allows us to manage and close a transaction more efficiently than anyone else.