Wondering what a viatical settlement is all about? This kind of settlement happens when somebody who is chronically or terminally sick sells their life insurance policy to someone else. The buyer of the policy gets the death benefit when the seller passes away. The policy seller will receive a payout that is more substantial than the cash surrender value but remains less than the full death benefit amount.
If you’ve ever suffered from a serious medical condition, you likely understand that health insurance doesn’t always cover everything needed. However, those with a life insurance policy have alternatives that can help put money in the bank for treatment that isn’t covered. One of those is a viatical settlement.
The most considerable advantage of choosing a viatical settlement instead of other options is that the policyholder will acquire more income than would be granted by the policy’s cash surrender value. This can provide extra money for medical expenditures or make life more comfortable while waiting for the end.
The main disadvantage of this settlement is that any beneficiaries will not receive their benefits until the seller has died. This article will explain all you need to understand about viatical settlements, including what they are, how they’re regulated and taxed, and what kinds of viatical settlements are available.
Table of Contents:
- Types of viatical settlements
- How viatical settlements work
- Differences between life settlements and viatical settlements
- Determining eligibility of viatical settlements
- Why policyholders choose viatical settlements
- How viatical settlement payouts are decided
- Regulations regarding viatical settlements
Types of Viatical Settlements
There are two different types of this settlement with one for those who are chronically ill and the other for those who are terminally ill. Someone who is chronically ill is unable to perform at least two daily living activities. These include things like using the bathroom, dressing oneself, eating, or bathing oneself. Those who are chronically ill likewise require a large amount of supervision to preserve their safety and health. On the other hand, someone who is terminally ill is expected to live for no longer than 24 months.
How Viatical Settlements Work
A person with a life insurance policy will work with a settlement broker or company that will offer them a cash payment with a viatical settlement. Once the settlement is made, the company or individual who purchased the policy will make payments on premiums and receive the death benefit when the seller dies.
During a viatical settlement transaction, the policyholder will transfer ownership of the policy to a buyer. This means that the seller is no longer required to pay premiums for the policy. There is also a third party, which is called a viatical provider, who takes responsibility for all of the expenses associated with the policy.
Differences Between Life Settlements and Viatical Settlements
If you’re familiar with a life settlement, you might be wondering what makes it different from a viatical settlement. There are a few important things that differ between the two:
- Viatical settlements are created for the chronically or terminally ill. With a life settlement, there is no requirement to be sick.
- Life settlements only work with permanent policies like variable life insurance, universal life insurance, or whole life insurance. With a viatical settlement, this is not a requirement.
- Most of the time, a viatical settlement will pay much more money than a typical life settlement.
- Taxes are different for life settlements and viatical settlements. Viatical settlements aren’t subject to income tax, but some parts of a life settlement will be. The amount spent on premiums isn’t counted, but the remainder will be subject to capital gains and income taxes.
Determining Eligibility for Viatical Settlements
If you’re reading this and wondering whether you should pursue a viatical settlement, we have the information you need to decide. In order to qualify for this type of settlement, all the requirements below must be met:
- The policy has to have a face value of $200,000 or more.
- The life insurance policy has to be two years old or more.
- All policyholders have to be chronically or terminally ill. This usually applies only to those with short life expectancies. Medical records will be required to prove a policyholder meets requirements.
Why Policyholders Choose a Viatical Settlement
There are all sorts of reasons why a person might choose a viatical settlement. Most of the time, it’s because the policyholder needs extra money to handle end of life or medical expenses. However, this shouldn’t be an immediate decision. It’s essential to research the option. Below are a few of the reasons you might consider a viatical settlement.
Inability to Pay Insurance Premiums
Expensive medical bills can make it hard to meet financial requirements and sometimes maintaining everything is impossible. If you let your life insurance policy lapse due to making no payments, it can leave you with no payout at all. Those who choose a viatical settlement will get a cash payment immediately but will also not have to worry about monthly payments any longer.
The Death Benefit Isn’t Needed
Most people choose to take out life insurance because they want to leave something behind for family members and loved ones. However, if your recipients are independent financially, they may not require the death benefits. Your own needs may be more critical, which can lead to the need for a viatical settlement.
Term Life Insurance Policy is Expiring
When a term life insurance policy expires, it typically has no cash value and replacing it can be overly expensive. Rather than letting it expire where it becomes useless, converting it into a perpetual plan will allow you to choose a viatical or life settlement instead.
Need for Better Quality of Life
When you pursue a viatical settlement, you have a way to supplement any income you have for better financial security. For individuals struggling to pay the bills, having a monetary payment from a settlement can help you get back in a better financial position.
How Viatical Settlement Payouts Are Decided
There are three main factors that go into how much a viatical settlement will offer as payment. These include the size and type of life insurance policy, the life expectancy of the policyholder, and the expected premium costs.
Size and Type of Policy
As you might guess, a larger policy is worth more money. However, companies will also consider what type of life insurance is being sold. For example, a term policy is going to be worth less than a permanent policy would be. After an estimate is made of what cost will keep the policy active, it can be compared with the benefit of the policy.
Expected Premium Costs
The settlement provider will look over the expected premium costs to decide what the costs are to keep it functioning until the policyholder’s death. This is done through an in-force illustration that indicates the premiums remaining if the policyholder achieves their life expectancy. Also considered are the interest rate and any other essential factors.
To decide on life expectancy, a settlement provider will use medical records and HIPPA release forms to determine how long a policyholder is likely to live.
Regulations Related to Viatical Settlements
Every state regulates its own viatical settlements using their departments of insurance. The state rules protect more than 90% of the people who are insured and considering a viatical settlement. Thorough viatical settlement regulations and laws are provided in Puerto Rico as well as 45 states.
Keep in mind that New Mexico and Michigan regulate viatical settlements but do not do the same for standard life settlements. One of the things that varies the most is how long you have to have owned your policy before it can be sold. This is typically two years, but some states have no regulations and others can have up to a five-year waiting period.
Regulations are different in every state, but there are some standard rules to know. Each of these things is put in place to protect the person who initially has the policy:
- There are provisions that let people sell their policies before the waiting period in situations where terminal illness is present in some states.
- Substantial disclosure must be provided by the settlement company, which includes a disclosure of the compensation to brokers.
- The NAIC Viatical Settlement Model offers suggested minimum payouts based on the policyholder’s life expectancy.
- Settlement providers must provide information about alternative options to viatical settlements.
- All viatical settlement providers, agents, and brokers have to be licensed.
- Providers are required to disclose risks related to government assistance programs and taxation.
Going Ahead with a Viatical Settlement
If you’re interested in a viatical settlement, the first thing you want to do is get in touch with a settlement company that can connect you to a broker or can purchase your life insurance policy. You should also be aware that your insurance company will play a role in the proceedings. Some agents from insurance companies can work with life settlement brokers.
The person representing you from the insurance company will work with the person purchasing the policy. However, they will also be responsible for working in your best interest. If you’re in a situation where you’re dealing with a chronic or terminal illness and want to sell your life insurance, this is one of the avenues that will help you do so.