Terminal illnesses not only destroy lives, but they can also erode the financial stability of individuals and their families. A viatical settlement, however, can provide financial support and emotional comfort to those with serous diseases.
A viatical settlement is simply the sale of the benefits of a life insurance policy to a third party. Viatical settlements, also called “viaticals”, allow individuals facing a terminal illness to use the present day value of their life insurance policy to ease the financial burdens.
The viatical settlement business originated in the 1980s as a way to give terminally ill AIDS patients early access to their life insurance benefits. Since then, the use of viatical settlements has broadened significantly. Viaticals now include policy holders suffering from Lou Gehrig№s disease, cancer, heart disease and other life-threatening illnesses.
The Importance of Viatical Settlements
Viatical settlements can provide an important source of funding for terminally ill people battling the high costs of medical care. An estimated 40 million Americans are not covered by health insurance, and many are often unable to earn a living because of their illness. These individuals must cover their medical costs out-of-pocked on top of daily living expenses such as food, shelter, utilities and transportation. Viatical settlements allow people in these circumstances to maintain a level of financial security during their final months or years.
Viatical settlements are completely legal transactions based on this concept: Investors buy life insurance benefits from insured individuals for a percentage of the face value of their policies. Then they collect the full amount of the death benefit on the policy when that person dies. For terminally ill people, viatical settlements allow them to receive a partial payment on their policies while they are still alive. They can use these funds to pay for their health care, to meet daily living expenses, or even take a well-deserved vacation with their families. The bottom line is: Viatical settlements enable individuals to take advantage of their life insurance benefits before they die and enhance the quality of the life they have remaining.
How Viatical Settlements Work
Viatical settlements are relatively common. Here’s how they work. The owner of the life insurance policy sells the policy for a percentage of the death benefit. The discounted price received is typically 60 to 70 percent of the policy’s face value.
The viatical settlement buyer becomes the new policy owner and/or beneficiary of the life insurance policy and is responsible for paying all future premiums. The buyer also collects the death benefit of the policy when the insured dies.
The original owner of the insurance policy, incidentally, may not necessarily be the individual with the life-threatening illness.
The approval process for viatical agreements is generally based on the nature of the illness or condition and a doctor’s review of the insured’s medical records. Usually the viatical settlement transaction is facilitated through a broker or a trusted insurance agent—without the buyer ever meeting the ill person.
Guidelines for the Sale of Viatical Settlements
Almost any type of life insurance can be sold through a viatical settlement as long as the policy doesn’t prohibit transferring ownership rights. Universal, whole, term, and even group life insurance policies are usually accepted.
However many policies include a “contestability clause” that allows an insurance company to cancel a policy if it discovers that the policy holder had a preexisting condition. Therefore, most settlement companies will only buy policies that are at least two years old.
There are generally two types of companies that purchase viatical settlements. The first type buys life insurance policies directly from ill people, using either private funds or proceeds from the sale of company stock. These companies, themselves, hold all the rights to the insurance policy and act as the designated beneficiary of the policy. These are considered to be “non-brokered” transactions because the viatical settlement provider purchases the policies directly.
The second type of viatical settlement company acts as a broker or intermediary—the category into which most settlement companies fall. They match a group of potential buyers with a life insurance policy available for sale, rather than directly purchasing the policy. As the broker, the viatical settlement company doesn’t own the policy. Instead, it is entitled to a percentage of the death benefit or purchase price—usually 4 to 6 percent—as compensation for its services.
Each settlement company has its own set of rules and limitations that govern the purchase of viaticals. The death benefit percentage that individuals receive when selling their policies is largely determined by their life expectancy. The shorter the life expectancy, the more they can expect to receive for their insurance benefits.
For example, an individual with just eight months to live may receive more than 90 percent of a policy’s face value. Someone expected to live for two years, on the other hand, may only be able get 50 percent of the death benefit.
State Regulations
Regardless of how much the policy holder receives from the insurance policy, viatical settlement payments are generally tax-free. However, to qualify for tax-favored treatment, the individual must be terminally ill and live in a state that regulates viatical settlements. Residents of other states may receive a tax benefit if the company buying the policy satisfies viatical settlement guidelines outlined by the National Association of Insurance Commissioners.
There are a variety of limitations involved with viaticals sales, depending on the state involved. Therefore, anyone considering a viatical settlement should consult with a qualified tax and legal professionals.
As another piece of advice: Before finalizing a viatical settlement, policy holders should also explore options that their life insurance firms may offer. Increasingly, companies allow policy holders to borrow against their policies. And some policies offer a cash value separate from the death benefit and accelerated death benefits that can offer access to cash. If no feasible options are available, viatical settlements may be the ideal option for terminally ill individuals and their families.