Viatical Settlements

Viatical Settlement Definition

A viatical settlement is the sale of a life insurance policy to a third party for cash. The insured individual must be diagnosed as being terminally ill with a life expectancy of 24 months or less, or have a chronic illness.

As the U.S. population ages, more and more people are developing diseases like diabetes and cancer. Many of these individuals need money to pay for their care, making viatical settlements a more attractive option. Nevertheless, most Americans who qualify for viatical settlements don’t take advantage because they are simply unaware of this option.

Due to increased popularity, viatical settlements are now subject to strict regulation in most states. While individual rules and regulations vary from state to state, a common statute is that life insurance policies must be in force for two years to be eligible for sale to a third party. Also, viatical settlement brokers must be licensed and are subject to continuing education requirements.

Viatical vs. Life Settlements

People are often confused when comparing a viatical settlement to a life settlement. The two are very similar in that a sum of money is paid to the policyowner for selling the life insurance policy to a third party.

The major difference between the two is that with a viatical settlement, the insured must be terminally ill with a life expectancy of 24 months or less. Viatical settlements generally have a higher purchase value than life settlements because a shorter life expectancy (24 months or less) will bring higher offers than cases with a longer life expectancy.

Viatical settlements and life settlements are also taxed differently. A professional tax advisor should be consulted for clarification and interpretation as tax laws vary from state to state.

The Taxation of Viatical Settlements

In most cases, the payment received from the sale of the policy is exempt from federal taxation, just as it is for a death benefit being paid to a beneficiary. This pertains to funds being received for the insured having a life expectancy of less than two years.

However, it can be different for individuals suffering from a chronic illness. If that person uses the funds to pay for long-term care, the proceeds from the sale are also normally tax-free. If only a portion of the proceeds is used for long-term care, the balance can be taxable.

The Internal Revenue Service’s tax code is the definitive source for the current tax status of viatical settlements. Before selling a life insurance policy, policyholders are encouraged to consult with a tax professional to confirm the current federal and state tax status.

Viatical Settlement Alternatives

A reputable viatical settlement broker will evaluate a policy and provide all availalbe options, even if that option does not include a settlement.

One of these non-settlement options is the Accelerated Death Benefit (ADB), which can be found as a rider in some insurance policies. The ADB rider allows a policyholder diagnosed with a serious illness to receive a higher percentage of the face amount of the policy while still living.

ADB riders can yield up to 100% of the face amount. The remaining face amount not paid to the policyowner stays in force as a death benefit payable to the named beneficiaries.

Like viatical settlements, there are stringent requirements in place for policyholders that wish to take advantage of the ADB. Typically, the insured must provide medical records proving a serious illness. ADB riders state that terminal illness will result in death between 6 months and 24 months, depending upon the carrier and type of policy.

The dollar amount of the benefit is paid up to the percentage and/or dollar amount outlined in the rider if the insured satisfies the terminal illness definition.

Reading the fine print of the policy is advised. Insurers will frequently charge administrative fees, which can be lump sums or a percentage of the payout. This needs to be factored in when comparing the ADB to a viatical settlement.

Another option to consider is borrowing a portion of the cash value that has built up over the years as a feature of the life insurance policy. Depending upon the premiums paid and the face amount of the policy, this can be a sizable sum that is available to the policy owner.

Policy loans are often available as no-interest or low-interest loans since the interest rate charged is offset by the interest rate credited. The loan amount will be deducted from the face amount of the policy upon death, but the face amount can still be a sizable amount for beneficiaries depending upon the percentage of cash value borrowed.

Consult with a licensed viatical settlement broker to review your policy and determine what the best alternative is for you.

Viatical Settlement Brokers

When considering a viatical settlement broker, policyholders should bear in mind that different states have different licensing requirements. Some states, in an effort to promote consumer protection, actually require policyholders to work with a broker.

Policyholders with serious health impariments are encouraged to work with someone that has their best interests in mind. Viatical settlement brokers have a “fiduciary” responsibility, meaning they are required to prioritize the needs of the policyholder. Otherwise, brokers risk losing their license.

Policyholders tend to feel more comfortable interviewing several brokers early in the process in order to gauge compatibility, transparency, and trustworthiness. Things to look for in a broker are:

Transparency concerning fees and scope of the services offered
Security and trustwortiness concerning a policyholder’s confidential information
Proper insurance in place to protect consumers.
In compliance with the local regulations involved in the transaction
Shops your policy with multiple buyers to get the best offer
Offers a viatical settlement calculator to help consumers get an immediate estimate for a specific policy.

Policyholders are encouraged to spend considerable when time selecting a viatical settlement broker. It’s a very important decision. Reputable brokers will take the time to answer all questions and will provide references for you to talk with about their experience.

Viatical Settlement Calculators are intended to assist in the evaluation and qualification of life insurance policies. They provide general estimates and are not intended to represent a bid or an actual offer to purchase a life insurance policy. The results are not binding and do not guarantee that any life settlement provider will offer to purchase a policy. By using a Viatical Settlement Calculator, policyholders usually authorize viatical settlement brokers to make contact, including by telephone.

No representation or warranty, expressed or implied, is made as to the accuracy, reliability or completeness of the results.

Viatical Settlement Calculator

Before talking with a viatical settlement broker, policyholders may want to use a viatical settlement calculator to see if a policy qualifies for a viatical settlement. If qualified, the calculator will provide a ballpark estimate of the policy’s value on the secondary market.