Viatical Settlement

What Is a Viatical Settlement?

A viatical settlement is an arrangement in which someone who is terminally or chronically ill sells their life insurance policy at a discount from its face value for ready cash. In exchange for the cash, the seller of the life insurance policy relinquishes the right to leave the policy's death benefit to a beneficiary of their choice.

The buyer of a viatical settlement pays the seller a lump sum cash payout and pays all future premiums left on the life insurance policy. The buyer becomes the sole beneficiary and cashes in the full amount of the policy when the original owner dies.

Understanding a Viatical Settlement

Viatical settlements enable owners of life insurance policies to sell their policies to investors. Investors buy the full policy or a portion of it at a cost that is less than the policy's death benefit. The investor's rate of return depends upon when the seller dies. The rate of return will be lower if the seller outlives their estimated life expectancy. Conversely, the rate of return will be greater if the seller dies sooner than estimated.

For someone who is terminally ill, a viatical settlement enables them to obtain immediate cash they can use to pay for their care and comfort in their final days. A viatical settlement can be a financial management tool that enables individuals to preserve their estate's other assets — such as a home — which they may not want to sell before their death.

Criticism of Viatical Settlements

From an investment perspective, a viatical settlement can be extremely risky. The rate of return is unknown because it's impossible to know when someone will die. If you invest in a viatical settlement, you are speculating on death. Therefore, the longer the life expectancy, the cheaper the policy. However, because of the time value of money (TVM), the longer the person lives, the lower your rate of return.

In many states in the U.S., companies that buy viatical settlements to sell to investors are licensed by state insurance commissioners. For more information and a list of state insurance regulators, visit the National Association of Insurance Commissioners (NAIC).

Viatical Settlement vs. Life Settlement

Individuals not facing a health crisis may also choose to sell their life insurance policies to get cash, which is more typically referred to as a life settlement. A life settlement differs from a viatical settlement in that the insured has a longer life expectancy. In a viatical settlement, the life expectancy of the insured is generally two years or less.

If a life insurance policyholder is considering a life settlement, they should first consider all available options for obtaining the needed cash. There might be a better way to utilize a life insurance policy.

For instance, a life insurance policyholder may be able to access some of the cash value to meet their immediate needs while keeping the policy in force for beneficiaries. It might also be possible to use the cash value as security for a loan from a financial institution.

An accelerated death benefit (ADB) is also an option. An accelerated death benefit usually pays some of a policy’s death benefit before the insured dies. This could provide the holder of the life insurance policy with the cash needed without having to sell the policy to a third party.

Special Considerations

There are various points to consider before deciding on either a viatical settlement or a life settlement: