Viatical Settlements: All You Need to Know
Steve Brown
August 28, 2007
The Definition of A Viatical Settlement
A Viatical Settlement is a financial transaction whereby the owner of life insurance policy sells that policy to an investor in exchange for a lump-sum payment. The viatical settlement investor can be either an individual investor or a corporate investor e.g. a viatical settlement company. The vast majority of viatical settlements are pursued by individuals who are terminally ill, however, healthy people can also engage in a viatical settlement arrangement with an investor.
How Do Viatical Settlements Work?
How does a viatical settlement work? Once an agreement has been reached, the original policy holder will receive a lump-sum payment from the investor, an amount that is a percentage of the life insurance policy's face value. The investor will then assume the responsibility of making payments on the life insurance policy until the original policy holder dies. The proceeds of the policy are then paid to the investor.
Is A Viatical Settlement Right For My Situation?
It should be understood that a viatical settlement is a very serious financial transaction that will greatly affect a person's financial legacy. The viatical settlement option should only be used in extreme circumstances where a large amount of cash is needed quickly. A better option would be to have a life insurance policy that includes an accelerated benefits (also known as "life benefits") option where the proceeds of a life insurance policy is paid to a terminally ill individual before that individual dies. The accelerated benefits feature is sometimes included when a new policy is sold to an individual, but not always. However, an accelerated benefits option can be attached to an existing policy in the form of a rider if the original policy does not include this option.
Other alternatives to a viatical settlement include borrowing against the life insurance policy or borrowing from the beneficiary of a life insurance policy (a reasonable exchange since the beneficiary will be receiving a large cash payment when the policy holder dies.)
There are also tax implications to consider. A 1997 Act of Congress altered the US Tax code so that viatical settlements (and accelerated benefits) are now tax exempt. But there's a catch (of course): the life expectancy of the original life insurance policy holder must be less than two (2) years and the viatical settlement company involved must be licensed.
Most states have also made viatical settlements exempt from state taxation as well, but not all states. It is best to check with a tax professional (an accountant, tax lawyer, financial planner, etc.) before opting for a viatical settlement so that you can have all the current state and federal tax information available to you when making your decision.
Finally, both viatical settlements and accelerated benefits may affect your eligibility for federally funded, needs-based public assistance programs like Medicaid.
Viatical Settlement Tips
If you do decide to opt for a viatical settlement, here are some important tips:
A Viatical Settlement is a financial transaction whereby the owner of life insurance policy sells that policy to an investor in exchange for a lump-sum payment. The viatical settlement investor can be either an individual investor or a corporate investor e.g. a viatical settlement company. The vast majority of viatical settlements are pursued by individuals who are terminally ill, however, healthy people can also engage in a viatical settlement arrangement with an investor.
How Do Viatical Settlements Work?
How does a viatical settlement work? Once an agreement has been reached, the original policy holder will receive a lump-sum payment from the investor, an amount that is a percentage of the life insurance policy's face value. The investor will then assume the responsibility of making payments on the life insurance policy until the original policy holder dies. The proceeds of the policy are then paid to the investor.
Is A Viatical Settlement Right For My Situation?
It should be understood that a viatical settlement is a very serious financial transaction that will greatly affect a person's financial legacy. The viatical settlement option should only be used in extreme circumstances where a large amount of cash is needed quickly. A better option would be to have a life insurance policy that includes an accelerated benefits (also known as "life benefits") option where the proceeds of a life insurance policy is paid to a terminally ill individual before that individual dies. The accelerated benefits feature is sometimes included when a new policy is sold to an individual, but not always. However, an accelerated benefits option can be attached to an existing policy in the form of a rider if the original policy does not include this option.
Other alternatives to a viatical settlement include borrowing against the life insurance policy or borrowing from the beneficiary of a life insurance policy (a reasonable exchange since the beneficiary will be receiving a large cash payment when the policy holder dies.)
There are also tax implications to consider. A 1997 Act of Congress altered the US Tax code so that viatical settlements (and accelerated benefits) are now tax exempt. But there's a catch (of course): the life expectancy of the original life insurance policy holder must be less than two (2) years and the viatical settlement company involved must be licensed.
Most states have also made viatical settlements exempt from state taxation as well, but not all states. It is best to check with a tax professional (an accountant, tax lawyer, financial planner, etc.) before opting for a viatical settlement so that you can have all the current state and federal tax information available to you when making your decision.
Finally, both viatical settlements and accelerated benefits may affect your eligibility for federally funded, needs-based public assistance programs like Medicaid.
Viatical Settlement Tips
If you do decide to opt for a viatical settlement, here are some important tips:
- Once you pick a settlement company, have the settlement company setup an escrow account with an escrow service provider that has a proven track record of integrity and honesty. In this way, you can rest assured that the money is ready and waiting for you once the settlement deal has been finalized.
- A viatical settlement company representative may try to use high pressure sales tactics in an effort to get you to sign on with that company and keep you from considering a competitor. Don't give in to the pressure. Do your homework and choose the best settlement company based on the best available data and the cold, hard facts. Remember: it's never a good sign when a company has to resort to high pressure sales tactics in order to win your business. Caveat emptor.
- Research the settlement company. Contact your state's department of insurance, or your state's Attorney General's office, and ask if there have been any complaints against the settlement company you plan on using.
- Once you sign onto a viatical settlement agreement, you should be aware that the original beneficiary of your life insurance policy will not receive any monetary benefits whatsoever when the time comes. It's best to seek the advice of a probate professional before signing on the dotted line.
- Just as you would do with any major financial decision, shop around and make sure that the settlement deal you are getting is honest and competitive.
- Life expectancy matters: A viatical settlement company will often agree to pay a substantially higher percentage of the face value of a policy if your life expectancy is 6 months as opposed to 2 years.
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