Definition
A viatical settlement refers to the sale of a policyholder’s existing life insurance policy to a third party for a one-time cash payment. The payment is less than the full death benefit but more than the policy’s cash surrender value. It’s generally chosen by people with a terminal illness, providing them immediate cash.
Key Takeaways
- A Viatical Settlement represents a financial transaction where a person with a terminal or chronic illness sells their life insurance policy at a discount from its face value for immediate cash funds.
- They can provide the policy owner with much-needed financial resources during a challenging health crisis. However, the funds received will typically be a lot less than the overall death benefit that beneficiaries would receive.
- While it provides immediate liquidity to the policy holder, Viatical Settlements can have potential tax implications and can have an impact on eligibility for certain public assistance programs. Therefore, it is important to fully consider these aspects and potentially seek professional advice before proceeding with such a settlement.
Importance
A Viatical Settlement is an important financial term as it refers to a mechanism that allows a person with a terminal or chronic illness to sell their life insurance policy to a third party for immediate funds, often at a value greater than the surrender value of the policy.
This financial arrangement is typically used when the policyholder needs immediate resources for medical treatments, living expenses, or any other purposes during a time of critical illness.
The third party who purchases the policy takes on the premium payments and eventually receives the death benefit.
Therefore, viatical settlements provide a financial lifeline to the seriously ill while offering a potential investment opportunity to the buyer.
Explanation
A viatical settlement comes into play as a financial strategy in the realm of life insurance. Its purpose is to provide immediate funds to an individual with a terminal illness or someone who has a life expectancy of less than two years. In essence, this strategy allows the individual in question to sell their life insurance policy to a third party – typically a viatical settlement company – for a percentage of its overall death benefit value, which is largely determined by their life expectancy.
The funds can be used for any purpose such as paying for medical costs, living expenses or fulfilling a lifelong dream. The viatical settlement serves another vital role for policyholders who may not have beneficiaries to receive the death benefits of their insurance policy. It allows them to employ the value of their policy while they are still living.
It is also beneficial in scenarios where the policyholder struggles to pay for the insurance premiums; by selling the policy, they can get rid of their premium payments. The viatical settlement company that purchases the policy takes on the responsibility of those payments and later receives the entire death benefit once the original policyholder passes away. Overall, viatical settlements offer a lifeline for individuals battling terminal illnesses, translating their life insurance policies into immediate financial support.
Examples of Viatical Settlement
Viatical Settlement is a financial term that refers to the sale of a person’s life insurance policy. In such a transaction, a policyholder sells their life insurance policy to a third party for a lump sum. This type of settlement is usually done in situations where the policyholder is terminally ill and needs the money for medical expenses. Here are three real-world examples of a viatical settlement:
John has been diagnosed with a terminal illness and does not have long to live. He has a life insurance policy worth $1 million. The medical expenses are quickly piling up and John needs money right now. Instead of waiting for the death benefit, he decides to sell his policy to a viatical settlement company for $500,
This allows John to pay his medical bills and ensure his family does not suffer financially after his passing.
Mary is living with a chronic illness and has a high-end life insurance policy. Because of her condition, she can no longer work and her savings are depleting. She finds a viatical settlement provider who offers her a good portion of her policy value. By selling her policy, Mary is now able to afford her living expenses and the medical treatments that her insurance doesn’t fully cover.
Robert is elderly and diagnosed with cancer. He has a life insurance policy, but his children are already financially independent and don’t need the death benefit from his policy. He decides to sell his life insurance policy to a viatical settlement provider for an amount higher than the cash surrender value but less than the net death benefit. This enables him to enjoy his remaining days in financial comfort while also covering his health care costs.
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Viatical Settlement FAQ
What is a Viatical Settlement?
A Viatical Settlement is a financial transaction in which a person with a terminal illness sells their life insurance policy to a third party for cash. The third party then becomes the beneficiary of the policy and receives the payout upon the original policyholder’s death.
Who can benefit from a Viatical Settlement?
The policyholder benefits from a Viatical Settlement by receiving immediate funds that can be used for any purpose, including paying for medical expenses or improving quality of life. The buyer benefits by receiving the death benefit of the life insurance policy once the original policyholder passes away.
What does the Viatical Settlement process involve?
The process involves the policyholder or his/her legal representative providing medical and life insurance policy records to the viatical settlement company. The company then reviews the information, and if it deems the policyholder to be terminally ill, it will offer a cash settlement. Once the offer has been accepted and the necessary paperwork has been completed, the company will become the new owner and beneficiary of the policy and will be responsible for the policy premiums until the policyholder’s death.
What are the potential drawbacks of a Viatical Settlement?
Potential drawbacks of a Viatical Settlement include the policyholder receiving less money than the death benefit of the policy, the risk of outliving the cash payout, and potential tax implications. If the policyholder receives government assistance such as Medicaid, obtaining a viatical settlement could make him/her ineligible for such benefits.
Are Viatical Settlements regulated?
Yes, Viatical Settlements are regulated. The regulation varies from state to state in the U.S., with some states requiring the settlement companies to be licensed. It is advised to check with a legal advisor or state insurance department for specific rules and regulations.
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Related Entrepreneurship Terms
- Life insurance
- Terminal illness
- Policyholder
- Viatical settlement provider
- Life expectancy
Sources for More Information
- Investopedia: This site provides investors with comprehensive, accurate, and reliable information on various financial topics, including Viatical Settlements.
- CFA Institute: A global, nonprofit member organization of financial analysts, portfolio managers, and other investment professionals. You might find detailed articles and studies on Viatical Settlements here.
- National Association of Insurance Commissioners (NAIC): This U.S. standard-setting and regulatory support organization provides information on insurance regulations, which includes aspects of Viatical Settlements.
- Internal Revenue Service (IRS): The IRS provides tax-related information on a wide range of financial topics, including Viatical Settlements.
