What is a Viatical Settlement?
Are you terminally ill and looking for a way to pay for things that will improve the quality of your remaining life, such as medical treatments, home health care, or travel? Do you have a life insurance policy? If so, then you may have an option for funding these expenses that you didn’t know about. It’s called a viatical settlement.
A viatical settlement provides money to someone who faces a shortened lifespan because of a terminal or chronic illness. It’s an agreement between a third party and a life insurance policyholder. The third party, an unrelated person, purchases the life insurance policy from the policyholder for an amount greater than the policy’s cash surrender value but less than its face value. The policyholder receives cash and stops paying the policy’s premiums. The third party takes over the premium payments and receives the policy’s face value when the policyholder dies.
Viatical Settlement Example
For an example of a viatical settlement, consider someone who is diagnosed with a terminal illness (which we’ll cover more in-depth later) and faces high medical bills to cover treatment and medical care. To cover these costs, the affected individual may decide to sell their life insurance through a viatical settlement. By doing so, the policyholder will sell their life insurance policy to a third party for a lump cash sum that can be used to cover any expenses, debts, or bucket list items as they see fit. Once the transaction is complete, the third party assumes full responsibility for all monthly premiums and maintenance costs relative to the policy. Once the original policyholder passes away, the third party collects the death benefit amount from the insurance company.
Legality Of Viatical Settlements
If you’re familiar with the term “insurable interest,” then you know you can’t normally take out a life insurance policy on another person unless their death would cause you financial loss or another hardship. This is why, typically, you can’t buy a life insurance policy on your elderly neighbor, but a corporation can buy a life insurance policy on its CEO. It might seem like an unrelated third party would not be able to collect on your life insurance policy because they don’t have an insurable interest.
Yet, there’s a legal precedent that makes viatical settlements possible, and it’s more than 100 years old. A 1911 Supreme Court case, Grigsby v. Russell, defined a life insurance policy as property that the policyholder has the right to sell, use as collateral, or borrow against.
Defining Key Terms
Viatical Settlement definition
The word “viatical” in “viatical settlement” comes from the Latin “viaticum,” which can refer to either a religious ritual for someone close to death, or to money or provisions for a journey. Both definitions are relevant for viatical settlements. If a terminally ill person has a life insurance policy and a payout to themselves today — a provision for the rest of their journey — would provide more benefit than a payout for their heirs later, a viatical settlement can accomplish that goal.
Cash Surrender Value definition
There are many types of permanent life insurance, including whole, universal, variable, and variable-universal, and all of them usually have a savings component called “cash value.” Most of each premium payment goes toward providing life insurance coverage, but a small part goes toward the policy’s cash value. Cash value accumulates over time, and the policyholder can borrow this money, use it to pay premiums, or use it to purchase additional insurance. The longer you’ve had a permanent policy, the larger its cash value tends to be.
Cash surrender value is an amount the insurance company will pay a policyholder who relinquishes their policy. Sometimes the cash value and the cash surrender value are the same; other times surrender charges reduce the cash value. Surrender charges do not always apply, especially for policies that have been active for many years.
When you give up your policy in exchange for its cash surrender value, you are no longer insured and your beneficiaries will not receive anything when you die. Instead, you will have a lump sum of cash, but that sum will usually be much less than the policy’s face value (often called the “death benefit”) or what you could potentially receive through a life or viatical settlement.
Face Value definition
The face value is the amount a life insurance company will pay to the policyholder’s beneficiaries upon the policyholder’s death as long as the policy is still in force at that time. When you hear someone refer to a $1 million dollar life insurance policy, the $1 million is the policy’s face value.
Types Of Viatical Settlements
There are two types of viatical settlements: settlements for the terminally ill and settlements for the chronically ill.
If a life insurance policyholder has an expected remaining lifespan of 24 months or less, they are considered terminally ill. Advanced heart disease, end-stage kidney disease, and certain stage 4 cancers are examples of terminal illnesses from which an individual is not expected to recover, even with treatment.
Viatical settlements provide an option for people with a terminal illness to cover medical costs and other expenses during their remaining time. Some people may choose to use the money from a viatical settlement to get their affairs in order (such as a mortgage), while others may want to use the funds to make the most of their remaining time through travel or other activities.
There are many types of chronic illness, but for the purposes of a viatical settlement, a specific definition of chronic illness applies. It is not enough to have a long-term sickness such as diabetes, heart disease, or rheumatoid arthritis. The chronic illness must be severe enough that the life insurance policyholder cannot perform two or more activities of daily living without substantial help. This is true even if their remaining lifespan is more than 24 months.
The insurance industry defines activities of daily living as:
- Transferring (for example, getting out of bed)
A policyholder can also be deemed chronically ill if they are severely chronically impaired: for example, if they have advanced Alzheimer’s or dementia. Any of these impairments must be long-term for the definition of chronically ill to apply.
In the case of chronic illnesses, Medicare will not cover long-term care costs and Medicaid has harsh eligibility restrictions, so they should not be relied on. Many people think their only options for paying long-term care expenses are selling their home or leaning on family members for financial support. However, viatical settlements can be used to pay for long-term care costs such as nursing homes, assisted living facilities, or at home health without parting with assets like a home or putting a financial strain on family members.
How Do Viatical Settlements Work?
Most states (but not all) have laws that regulate viatical settlements. Because there are state-by-state differences in these laws, the information here is based on model regulations created by the National Association of Insurance Commissioners to inform state law.
What Happens Under A Viatical Settlement?
Under a viatical settlement, a life insurance policyholder works with a settlement company (also called a settlement provider) or with a broker to sell their policy for a one-time cash payment.
To qualify, the policyholder must agree to share certain medical and personal information with prospective buyers of their policy. This information may include medical treatment and prescription records, responses to a medical history interview or questionnaire, the policyholder’s identity, and possibly certain family member’s identities, such as a spouse or significant other. This information is used in evaluating who has an interest in the policy and how much the policy is worth.
The policyholder will gather several offers through their settlement broker or through various settlement providers and will likely choose the offer from the highest bidder. In addition to getting several offers, you may want to be represented by an independent third party such as an attorney, certified public accountant, or accredited financial planner who has no financial interest in the transaction. This person can help protect your best interests and help you evaluate all your options for getting the extra money you need in case a viatical settlement is not the best choice for your situation.
If a viatical settlement is your best option, the next step is for the broker or provider to contact your insurance company to verify the details and status of your policy. In addition, you may need a signed statement from your doctor indicating that you are of sound mind and are not being pressured to sell your policy.
Once the paperwork is complete, the purchaser of the life insurance policy should put the settlement proceeds into an escrow account during the transfer process. The escrow account is held by a neutral third party who makes sure you receive the money you’ve been promised and to make sure the purchaser receives your policy. You can expect to receive the payment for your life insurance policy within three days of your insurance company transferring your policy to the purchaser and designating the purchaser as the new beneficiary. Once the transaction is complete, you are no longer responsible for paying the monthly premiums or any other maintenance costs associated with the life insurance policy and you can use the funds from a viatical settlement any way you’d like.
After the transfer is finalized and the payment has cleared, the purchaser is allowed to follow up from time to time to determine the policyholder’s health status. The follow-up interval can be every three months if the insured’s life expectancy is longer than one year and every month if the insured’s life expectancy is one year or less.
Viatical Settlement vs Life Settlement
A life settlement is similar to a viatical settlement, and sometimes you’ll see the terms used interchangeably but there are several key differences between the two.
As mentioned earlier, only people diagnosed as terminally or chronically ill are eligible for a viatical settlement, whereas you are not required to be sick for a life settlement.
Life settlements are also sometimes called “senior settlements” because they are usually made to individuals 65 and older. Sometimes the minimum age is 70. Whereas, a viatical settlement is designed to provide a relief option for a person of any age facing extreme medical circumstances as a result of a chronic or terminal illness.
A viatical settlement typically provides policyholders with a significantly higher payout compared to traditional life settlements. This is because the life expectancy of a person seeking a viatical settlement is far shorter, so the third-party buyer will likely incur fewer expenses of maintaining the policy (such as residual premium costs). This also helps the diagnosed policyholder to cover urgent medical expenses that may be significantly higher than someone seeking a life settlement.
With a traditional life settlement, the purchaser of the policyholder’s life insurance policy is not willing to pay as much because of the greater uncertainty over how many years the purchaser will be paying the policy’s premiums for and how long it will be until the purchaser receives the policy’s death benefit.
Unlike life settlement payouts, money received from a viatical settlement is generally not subject to federal income tax. This is because a life insurance policy’s death benefit is usually not taxable, and a viatical settlement’s benefit is considered an advance on the policy’s death benefit. The only exception would be in the case of a chronical illness viatical settlement, where the funds not used to cover long-term care expenses are taxed. Other than that specific case, you get to keep the entire cash payout for a viatical settlement!
By comparison, life settlement proceeds may be more likely to be taxed than viatical settlement proceeds. A life settlement requires you to report the money you receive as income on your next tax return. Because a life settlement may be paid to someone who is not expected to die for a decade or longer, the proceeds may be taxable to the extent they exceed the premiums paid. In other words, if you’ve paid $20,000 in premiums and receive a $50,000 life settlement, you may owe tax on $30,000.
State tax law is often different from federal tax law, and individual circumstances also affect tax liability, so it’s important to talk to a tax consultant or financial advisor before agreeing to a viatical settlement or a life settlement. This should not be considered tax advice.
Reasons to pursue a viatical settlement vs life settlement
- You are diagnosed with a terminal illness and need money to cover urgent medical expenses or want to get affairs in order before passing
- You are diagnosed with a chronic illness and need money to cover the costs of long-term care
- You want to pay off outstanding debts, such as 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
How Are Viatical Payouts Determined?
Your policy’s face value, of course, is a big factor in how large your payout from a viatical settlement will be. Recall that your payout will always be less than the policy’s face value but more than its cash surrender value.
In addition, your policy’s premiums will affect the payment you receive in a viatical settlement. Because the entity that buys your policy will be paying its premiums, a higher premium will result in a lower settlement.
Life expectancy also plays a key role in determining how much you might receive from a viatical settlement. Viatical settlement providers use your medical information combined with statistical information on other individuals to estimate your remaining life expectancy. The shorter your life expectancy, the larger the payout you can expect.
The type of insurance policy you have, term or permanent, may also affect your payout. The payout on a permanent policy will be higher because a permanent policy remains in force as long as the premiums are paid, meaning the beneficiary is almost certain to receive a death benefit. A term policy could run out before you pass away, meaning the policy would not pay any death benefit. Converting a term policy to a permanent policy could result in a larger payout, though the cost of a conversion must be factored into this decision.
How To Know Who Is Eligible For A Viatical Settlement
Not everyone with an insurance policy is eligible for a viatical settlement or even a life settlement. Certain restrictions apply.
As described earlier, having a terminal or chronic illness can make you eligible for a viatical settlement. You will be required to release your medical records to potential purchasers of your life insurance policy so they can verify your health status and life expectancy.
The Age Of The Life Insurance Policy
The settlement provider may require that your life insurance policy has been in force for at least two years. Life insurance policies typically have a two-year contestability period during which the insurance company can investigate whether the policyholder lied on their application and deny payment of the death benefit if so. Some policies also have a suicide clause stating that the policy will not pay out for death by suicide in the first one to two years.
The Value Of The Life Insurance Policy
Depending on what source you consult, you may read that your policy needs to be worth at least $50,000, at least $100,000, or at least $200,000 to be a good candidate for a viatical settlement. Different settlement providers may have different minimums and cases may vary under unique circumstances.
Reasons To Consider A Viatical Settlement
A viatical settlement is not the right choice for every terminally ill or chronically ill life insurance policyholder. The fundamental purpose of life insurance is to provide financial support to one’s beneficiaries, and in many situations, that purpose is still paramount. However, in some situations, the death benefit may no longer be important, and immediate concerns may be more important.
You Need To Cover Urgent Medical Expenses
In the case of a life-changing chronic or terminal illness diagnosis, you may be met with sudden and extremely high medical expenses. If insurance doesn’t cover everything, you’ll either need to pay out of pocket or consider selling assets such as your home. Few people realize their life insurance policy is an asset they can sell, and a viatical settlement enables you to sell your policy to cover unexpected medical expenses without parting with assets. Whether you need a way to fund long-term care or cover treatment costs, you should find out how much your life insurance policy is worth and consider this before parting with other assets.
You’re Unable To Pay The Monthly Insurance Premiums
The monthly premiums on a permanent life insurance policy can be expensive. Indeed, they can become unaffordable for someone who is terminally or chronically ill. Under these circumstances, individuals often face one medical expense after another; they may also be unable to work and therefore have little to no income.
Also, while many permanent life insurance policies have level premiums that are the same every year, others have modified premiums that increase several years into the policy or as a result of new medical conditions affecting the policyholder’s health. These premiums may be especially challenging to pay given increased medical expenses and decreased income.
If you can’t afford your life insurance policy premiums for whatever reason, a viatical settlement can be a better option than simply letting your policy lapse. You’ll get more than you would by surrendering the policy and you will no longer be responsible for expensive monthly premiums.
Your Term Policy Is Nearing Its Expiration Date
When a term life insurance policy is about to expire, the life insurance company may offer the policyholder the option of converting it to a permanent policy. This option could make sense because someone who is terminally or chronically ill typically will not qualify for a new policy, or if they do, the policy will have significant restrictions. For example, it may not pay a death benefit if the policyholder dies within the first two years, it may have a small death benefit, and the premiums may be costly.
Some people may consider letting their term policy expire rather than converting to a permanent policy because doing so can come with fees and you’ll have to continue paying monthly premiums. However, it’s better to sell your policy through a viatical settlement rather than letting it expire because at least you’ll get some money. You’d receive nothing from letting the policy expire, but selling it through a viatical settlement will award you a lump cash sum. The viatical settlement company will deal with the conversion of the policy including all associated fees and future monthly premiums, so there’s no reason not to sell your policy if you’re considering letting it expire.
You Want To Improve Your Quality Of Life
The money from a viatical settlement can allow chronically or terminally ill individuals to improve their quality of life by alleviating financial stress, paying for better care, providing for niceties, or taking a bucket list trip. For example, the settlement money might allow the policyholder to upgrade to a higher quality long-term care facility. This reason can be especially compelling for policyholders who no longer have a spouse or children who need the death benefit.
Your Beneficiaries Are Financially Independent
The primary purpose of a life insurance policy is to provide financial support for loved ones after your passing, but if your beneficiaries are financially independent you may find they don’t need the money. While money from a death benefit could provide an added layer of comfort for beneficiaries, your current medical needs may be a higher priority. Rather than leaning on loved ones for financial support, a viatical settlement enables you to handle these expenses on your own, and you can still leave any remaining money to beneficiaries.
The Pros And Cons Of A Viatical Settlement
Are you trying to decide whether a viatical settlement might be right for you or someone you love? Consider these pros and cons.
- Get an immediate lump sum payment that is higher than the policy’s cash surrender value.
- Help pay for medical expenses such as medical insurance premiums, medical treatment, or long-term care.
- Use your funds for better care, travel, or anything else that would improve your quality of life or make you happy.
- Stop paying life insurance premiums. The new owner of your life insurance policy will take over 100% of the premium payments and any other maintenance costs.
- You may lose Medicaid eligibility because Medicaid is a need-based program that depends on your income and assets.
- Your beneficiaries won’t receive anything upon your death, although you may choose to give them part of your viatical settlement payout.
- If you have debt, creditors may be able to seize the proceeds of your viatical settlement.
Alternatives To Viatical Settlements
If you are not eligible for a viatical settlement or are curious about other options, there are a few alternatives to obtain money through your life insurance policy.
Viatical settlements have strict eligibility requirements, so it’s possible you may qualify for a life settlement but not a viatical settlement. As mentioned earlier, the two are similar, but for a life settlement you do not need to have a chronic or terminal illness. In general, you just need to be at least 65 years old with a permanent or convertible term life insurance policy. If you are eligible for a life settlement, you can go through the same process as a viatical settlement to sell your life insurance for a lump cash sum that can be used as you see fit.
Accelerated Death Benefit (ADB)
An accelerated death benefit refers to a rider that is added to your life insurance policy. The ADB enables the policyholder to access a portion of their death benefit while they’re still alive. This money is later subtracted from the death benefit upon the policyholder’s passing. This may be a useful option under some circumstances, but you may find the ADB doesn’t provide enough funds to cover all of your urgent expenses.
If you have a permanent policy with cash value, you may be able to borrow against its value. When doing so, keep in mind that there will be fees and interest added to the original debt. If you are unable to pay the full amount back prior to your passing, the remaining loan balance will be subtracted from your death benefit.
Steps To Get Started
Life insurance policyholders have three ways to sell their policy through a viatical settlement: brokers, providers, and viatical settlement companies.
Viatical Settlement Brokers
A broker’s job is to shop around to identify and negotiate the best offer on your viatical settlement. In exchange for their service, they will receive 10% to 30% of your payout as their commission. A broker is legally required to act in your best financial interest; this is called “fiduciary duty.” They are not allowed to represent the interests of your life insurance company or the entity buying your policy. When you work with Harbor Life, you’ll have the opportunity to get an offer from our sister company, Harbor Life Brokerage, a licensed broker.
Before choosing a broker to work with, contact your state’s department of insurance to find out if viatical settlement brokers are required to be licensed in your state. If so, you want to make sure the broker is currently licensed. You also want to check the broker’s disciplinary history. Avoid working with a broker who has a history of breaking insurance laws or receiving customer complaints.
The broker’s commission will reduce the amount you receive from your settlement, but you may feel the cost is worth it for the convenience of not having to contact or negotiate with viatical settlement providers yourself. Brokers are required to disclose their commissions to the individuals they represent. A broker should also give you the full details of how many entities they contacted about purchasing your policy, how many offers they received, and the amount of those offers.
Viatical Settlement Providers
You don’t have to use a broker to sell your life insurance policy. You can act as your own broker and contact viatical settlement providers yourself. Providers are not required to act in your best interest, but they still must follow insurance laws.
A viatical settlement provider is a third-party organization or individual investor who bids on and purchases life insurance policies. To these groups, your policy is a financial asset so they will try to buy your policy for the lowest amount (as opposed to a broker, who works to get you the highest offer).
Submitting your policy to a provider is a long and complex process with lots of paperwork and confusing insurance terminology. Furthermore, you’ll only get one offer from each provider, so you’ll need to repeat this process multiple times if you want to maximize the value for your policy.
Due to the complexity and inconvenience of submitting a life insurance policy to providers, many people prefer to work with an experienced viatical settlement broker instead. As mentioned earlier, a broker will handle all of the paperwork and submit your policy to multiple providers, resulting in several offers which they’ll negotiate to raise the value.
Viatical Settlement Companies
Policyholders can also work with a viatical settlement company like Harbor Life that uses its connections with a network of brokers and providers to get the highest offer for your policy.
Working with a viatical settlement company like Harbor Life Settlements maximizes the value of your policy because we send it out to multiple providers and brokers, resulting in more offers than you’d otherwise be able to get. The more competition and bidders for your policy, the higher the value. Viatical settlement companies like us will handle all of the paperwork, and we’ll negotiate to get you the highest possible offer for your life insurance policy.
For many terminally or chronically ill people, time and money are running out, and a life insurance policy may be their most valuable remaining asset. A viatical settlement can be the best way to secure the financial cushion that would help them improve their quality of life. Though the payout will be smaller than the policy’s face value, it will be larger than the policy’s cash value, making a viatical settlement a superior alternative to letting the policy lapse. In the case of term life insurance policies, you won’t receive any money by letting it expire, so it’s better to sell it and get some money than nothing at all.
If you’d like to learn more about selling your life insurance policy through a viatical settlement, Harbor Life can help. Harbor Life offers a free estimate of your policy’s value and up to 60% of your policy value in cash. While some life settlement companies take as long as six to nine months, Harbor Life will buy your policy in as little as 10 days and pay you within weeks of approval.
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What Makes Harbor Life Settlements Different?
If you’re exploring the possibility of selling your life insurance policy, consider the advantages of choosing Harbor Life as your life settlement company.
– Harbor Life will provide you with a free estimate of your policy’s value.
– Harbor Life offers up to 60% of your policy value in cash, with no hidden fees and payouts, within weeks of approval.
– Harbor life will buy your policy in as little as 10 days, while other life settlement companies can take as long as six to nine months.