If you’re like many people, you own a life insurance policy. You probably purchased your policy years ago to make sure your family was cared for if something should happen to you. Once your children have grown up and are financially independent, however, that policy might not be as important as it once was. And if you have been diagnosed with a terminal illness and need cash now to help you cover expenses, perhaps a viatical settlement could be a good option for you. In a viatical settlement a buyer, known as the viatical settlement provider, will purchase your life insurance policy and you will receive a direct cash payment.
There are two types of life settlements solutions that people commonly utilize; these are traditional or senior life settlements and viatical settlements. While the two do share some similarities, there are notable differences. A traditional life settlement does not require that the insured be terminally ill to sell his or her life insurance policy for cash. Generally, as long as the policy is valued at $100,000 or higher and the insured is aged sixty-five years or older, he or she may be eligible to sell their policy.
A viatical settlement, however, requires the insured to have a terminal diagnosis and a life expectancy of around two years or sometimes as much as four years. This is an option to consider if you fall within those parameters and need cash now to help you cover expenses in the final years of your life. If you are considering a life settlement you probably have some questions.
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Can I sell my life insurance policy?
Yes, you can sell a life insurance policy for cash. Many people think about options such as surrendering a policy for its cash value or borrowing against the policy’s accumulated cash value. These are both completely viable options, but you will likely receive a higher payout if you sell your policy for cash. Selling your life insurance policy will depend on what type of policy you’ve got. Most often a permanent form of life insurance is involved in life settlement options. This would include a whole life or a universal life policy.
What about selling a term life insurance policy?
Selling a term life insurance policy for cash is also possible. Generally, if you have a term life insurance policy with a convertibility rider, you can convert your policy to a permanent form of insurance. You can think of a rider as being like an addition to an insurance policy. A convertibility rider simply means that your policy can be converted to a permanent form of insurance such as a whole life policy or a universal life policy.
However, it may be possible to sell a non-convertible term policy, particularly in the case of a viatical settlement where a terminal illness is a consideration.
What exactly is a viatical settlement and how can it help me?
In a viatical settlement you (the insured) will sell your life insurance to a buyer (the viatical settlement provider) for a cash payout. You may receive one lump sum payout or instead retain a portion of the future death benefit with no further premium obligation. To be eligible to utilize the viatical settlement option you must have a terminal diagnosis and a life expectancy of around four years or less. These settlements are meant to provide cash to help you cover the costs associated with your medical condition during the last few years of your life.
There are several reasons why a person would choose a viatical settlement. They include:
- Covering the costs of their basic healthcare: recent studies have shown that healthcare costs, on average, between $38,000 and $66,000 out-of-pocket during the final five years of a person’s life. Many people do not have that amount of money set aside.
- Covering the costs of nursing home or assisted living care: Medicare only covers nursing home care for up to one hundred days, and Medicaid will only cover nursing home care if the insured falls into specific income brackets. If you do not meet those requirements you could end up responsible for the costs of nursing home care. A private room can cost around $8000 a month. This means a two-year stay in a nursing home could easily soar above $200,000. Assisted living, while slightly less expensive, can still cost upwards of $5000 per month.
- Helping ease the financial burden on family members: no one wants to leave a large financial burden on their family members after they have passed away. A viatical settlement can help cover your medical costs while you’re still living so there is not as much for your family to pay for after your death.
- Paying for the costs of home renovations: if it possible to stay at home through your illness, you may wish to do so. But many homes aren’t equipped to handle the needs of those with serious, long-term illnesses and making improvements is costly. Upgrading a bathroom to be handicapped accessible, for example, can cost around $20,000. A viatical settlement option could help fund these improvements, allowing you to stay at home more comfortably.
General eligibility guidelines for a viatical settlement:
There are some requirements to be eligible for a viatical settlement. They include:
- Of course, having a terminal diagnosis or certain chronic conditions
- Having a permanent form of insurance or a term life insurance policy preferably convertible to a permanent form of insurance
- Having a life insurance policy that you have owned for at least two years
- Owning a life insurance policy with a face value of at least $100,000, though many viatical settlement providers are only interested in policies with a face value of $200.000 or more.
If you meet these requirements and have decided to move forward with the viatical settlement process, you will need to work with a licensed life settlement/viatical settlement provider, or purchaser of life insurance policies. There are some choices to be made in approaching the market – ou may choose to sell your policy with or without a broker. If you choose to use a broker you will have guidance throughout the entire process.
You need to be aware, however, that a broker receives a commission for his or her part of the sale that is deducted from your payout. If you choose to sell your policy on your own, there will be no commission deducted.
You should carefully consider which option will be best for you.
What are the steps to completing a viatical settlement?
- Step one: fill out an application. In this initial step you will provide your basic information as well as the information about your specific life insurance policy and your overall health. Questions about your specific condition and life expectancy are likely to be asked.
- Step two: providing the needed documentation. In this step you will provide your insurance policy information and sign a medical release form so that the necessary information can be gathered.
- Step three: review and submit offers. During this time the information you provided and that was gathered through the process will be reviewed. If your policy meets all the requirements you can begin to receive offers.
- Step four: receiving offers. You will receive, or your broker will advise you, of the offers you receive from potential viatical settlement providers. Once you have your offers you can decide which one you will accept. Sometimes these offers are negotiable and you can also walk away if you aren’t comfortable with any of them.
- Step five: Complete the transaction. Once you have decided to accept an offer from a viatical settlement provider, a closing package will be drawn up and all the necessary parties will sign the documents. You will then get information on when you can expect to receive your lump sum payout.
Things to be aware of:
A viatical settlement is a great option for a terminally ill person that needs an influx of cash to cover the costs discussed above. However, like any financial transaction, there are things you need to be aware of prior to selling your policy. These include:
- Any possible tax implications: a viatical settlement is generally NOT subject to federal taxation. However, states may have their own policies in regards to viatical settlements and it is important to be aware of them. A trusted tax advisor can help you in this area.
- Costs of the sale: as stated prior, if you choose to use a life settlement broker for your sale, they will collect a commission for their part. You will not pay anything upfront. The commission will be deducted from your payout. You will want to know what percentage of your funds will go to the broker so you can be prepared.
- Garnishment of your payout by creditors: there is a possibility that any creditors you have could claim part or all of your viatical settlement payout to cover outstanding debt. If you know you have outstanding debt you will want to speak with a trusted financial advisor about how this could affect your payout.
- You are waiving your death benefits: once you sell your policy, the viatical settlement provider now receives your death benefits, NOT your beneficiaries. It is important to understand this.
Wrapping it up:
While receiving a terminal diagnosis is a scary and uncertain time in your life, it doesn’t mean you cannot make the best of the time you have left. A viatical settlement can help you cover financial costs so that you have one less thing to think about. You can spend time with your family and enjoying your life. Selling your policy to a viatical settlement provider can give you the influx of cash you need to feel secure in the last years of your life.
Deciding to sell your life insurance in a viatical settlement is a personal decision that only you can make. But once you have done your research and decided that is the best option for you and current life situation, a viatical settlement provider may help get you on the path to financial security so that you can enjoy the final years of your life without financial burden.
Questions and answers:
Do I need to be terminally ill to utilize the viatical settlement option?
Yes. A viatical settlement is a life settlement option that requires the policyowner to have been diagnosed with a terminal condition. Life expectancy in a viatical settlement is generally four years or less.
Will I get more money from a viatical settlement than from surrendering my policy?
Yes, usually. You may get up to four times as much money from choosing to sell your policy in a viatical settlement than you would receive if you opted to surrender your policy for its accumulated cash value.
How long does the viatical settlement process usually take?
Selling a life insurance policy in a viatical settlement will take several weeks. Sometimes it can be completed in around two weeks, but you will want to plan for closer to four to six weeks. Much depends upon how quickly the contracts are signed and returned and how quickly third parties, such as the life insurance company, responds to requests to verify informaiton.
Once I sell my policy, do I still need to do anything?
No, the policy seller has no further obligations. Once a viatical settlement provider has purchased your policy, the purchaser assumes all responsibilities of the policy, including premium payments. and will also be entitled to any future death benefits.
Will it cost anything out of pocket?
No. If you choose to use a life settlement broker to complete the transaction, he or she will receive a commission for their services. However, this commission is deducted from the payout, not paid by you up front.
Is this process legally regulated?
Yes. While regulations vary by state, selling your policy in a viatical settlement is legal and is regulated. In most states, both the life settlement provider and broker, if you decide to hire one, must be licensed. Check with the state department of insurance for specific requirements of your state.
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