- Viatical Settlements vs Life Settlements: Definitions and Differences -
Viatical Settlement Definition
How does a Viatical Settlement Work?A viatical settlement becomes an option when a life insurance policyholder is diagnosed with a terminal illness or is chronically ill to the point where they can no longer perform two or more activities of daily living (such as eating, bathing, using a toilet, or dressing) for at least 90 days. Upon diagnosis, the policyholder can sell their life insurance for cash through a viatical settlement. To start the process, the policyholder connects with a viatical settlement company that will help facilitate this exchange. The role of viatical settlement companies is to take care of the hard work so the policyholder doesn’t have to deal with additional stress during this time. The viatical settlement company will find a buyer for the life insurance policy and facilitate the transfer of ownership from the policyholder to the third-party buyer. At this point, the policyholder will no longer be responsible for the policy premiums, and in exchange they’ll get a lump sum cash payment. The cash payment will be less than the death benefit amount, but it will be greater than the surrender amount and the policyholder will have the financial freedom to use the money as they please while they’re still living. The third-party who bought the policy will be responsible for all expenses related to the policy, and they’ll continue paying premiums until the policyholder passes away (at which point, they’ll receive the death benefit amount) from the insurance company.
Defining the Two Types of Viatical SettlementsThere are two types of viatical settlements that vary depending on the severity of the policyholder’s condition and/or illness.
1. Terminally Ill DefinitionThe United States government considers someone to be terminally ill if they are suffering from a serious illness and have a life expectancy that is fewer than 24 months from the date of diagnosis by a physician.
2. Chronically Ill DefinitionThe United States government considers someone to be chronically ill if they are unable to fulfill at least two activities of daily living on their own for at least 90 days. These are essential activities of daily life such as eating, bathing, using a toilet, or dressing among others. If a person requires considerable supervision to perform these activities, they may be defined as chronically ill in accordance with the federal qualifications for the term.
Life Settlement Definition
How does a Life Settlement Work?The process for obtaining a life settlement begins when a policyholder decides to sell their life insurance policy to a third-party. While viatical settlements are often used to cover urgent medical expenses, people often pursue life settlements to gain additional financial freedom in retirement. Unlike a viatical settlement, the policyholder does not need to be sick in order to obtain a life settlement. In fact, many people pursue life settlements around the age of 65 while they’re still healthy so they can make the most of their remaining years. To begin the process of obtaining a life settlement, a policyholder gets in touch with a settlement company that finds a buyer and facilitates the transfer of ownership for the policy. Once the right buyer is found, the policyholder will receive a lump sum cash payment and the buyer will take on all costs of maintaining the policy (such as premiums) until the former policyholder passes away. When this occurs, the buyer will receive the death benefit amount specified in the policy from the insurance company.
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Key Difference Between Viatical Settlements and Life Settlements
Viatical settlements are often confused and incorrectly used synonymously with life settlements, but there are several key differences between the terms outside of the aforementioned process. Select the tabs below to see the differences.
2. Payment Amount
3. Tax Impacts Amount
2. Payment Amount
3. Tax Impacts Amount
Reasons to Pursue a Viatical or Life Settlement
Common Reasons to Pursue a
- You are diagnosed with a terminal illness and need money to cover urgent medical expenses
- You are diagnosed with a chronic illness and need money to cover the costs of long-term care
Common Reasons to Pursue a
- You want to pay off outstanding debts, such as a mortgage
- You want to supplement your retirement with additional income for a more enjoyable lifestyle
- You want a cash reserve to cover emergency expenses when needed
What to Keep in Mind Before Deciding on a Viatical or Life Settlement
It’s important that you always consider all the choices that are offered to you and examine them thoroughly. Don’t let your life insurance expire and don’t agree to surrender the value of your insurance until you have researched all your options. Settlement companies will help you obtain the most cash from your insurance policy. By maximizing the value of your settlement, you can turn the unwanted policy into cash that you can put towards current expenses.
How to Choose a Viatical or Life Settlement Company
When looking at selling your life insurance policy, you’ll work with either a provider, broker, or settlement company (in some cases, you may work with a combination of these options). A settlement provider is the third-party that purchases the life insurance policy from the policyholder, occasionally, a provider also happens to be an investor. When you’re looking for a settlement provider—always make sure that the company is legitimate. This means that they need to have the proper documents and licenses to purchase life insurance policies on behalf of institutional stockholders. For a company to facilitate the transfer of even a single third-party life insurance policy, it should be a licensed settlement provider.
You may also want to contact a broker, who shops the case to multiple providers so you can get the best offer. Harbor Life’s sister company, Harbor Life Brokerage, is a licensed broker so when you register with Harbor Life, we may also work with our broker to ensure you get the most money for your case. Settlement companies such as Harbor Life act as facilitators to help you navigate the process of selling your life insurance through a life or viatical settlement. They do the heavy lifting so all you have to do is provide a few health documents and answer a few questions.
Settlement companies will also use their associations with providers and brokers to help you get the maximum value for your case. It’s important to choose a trusted and qualified settlement company because you want to ensure they have experts who will get you the most money from selling your life insurance policy.