Viatical Settlements vs. Life Settlements

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While most people choose to purchase a life insurance policy, quite a few policy owners end up changing their minds about their policy later in life. If you are a policyholder who no longer sees a need for their life insurance policy, then you can consider selling your insurance policy for cash.

Choosing to sell your life insurance policy for a life settlement or a viatical settlement can be the prudent choice for you. Many policyholders end up buying a life insurance policy quite early in their adult life. You may have bought one as well because you want your family and loved ones to have financial security in case anything happens to you. But once your children or beneficiaries attain financial independence, you might start to reconsider if you even want to keep paying your insurance premiums. If you choose to sell your life insurance policy for a life settlement or viatical settlements, then you can benefit in the following ways:

 

  • You no longer have to keep up with your life insurance premium payments.
  • You receive a cash payout from selling.
  • Furthermore, you can pay your medical bills if you qualify for a viatical settlement.

 

The two most common options to receive cash for your life insurance policy are traditional life settlements and viatical settlement. Both options do provide you with a cash payout – either a lump sum payment or in installments over a period of time. But there are certain marked differences between the two types of settlements.

 

To make the best decision regarding the sale of your policy, you need to understand how life settlements and viatical settlements work. Both options have certain requirements for eligibility, and how the payout from the settlement is taxed differs. If you decide to sell your life insurance policy, then you will need to choose the option that works best under your unique circumstances.

Understanding how selling your life insurance policy for a settlement works will help you receive the best possible cash payout. Your insurance agent or a life settlement advisor can help you with your decision about selling your policy. You may even consult a financial advisor or a tax advisor before you sell your policy.

Viatical Settlement

A policyholder gets a viatical settlement when they sell their insurance policy for cash. If the policyholder has been diagnosed with a terminal illness or with a life expectancy of less than two years, then the policyholder is eligible for a viatical settlement. The policyholder is also eligible if they have been diagnosed with a chronic illness or need long-term care, or if they cannot perform the daily life activities that are essential for survival – such as bathing, getting dressed, moving about, eating, and continence.

 

A viatical settlement is usually given out when the policyholder has a legitimate medical reason that is reflected in  their medical records. The proceeds from the settlement are supposed to cover the medical bills and associated costs of having a terminal illness or a chronic illness.

 

While the settlement amount will not match the policy face value, the cash payout of a viatical settlement can be quite generous. Ultimately, the payout the policyholder receives will depend on the cash value of their policy, the type of life insurance, and their life span. The longer the life expectancy of the policyholder, the lower the settlement amount will be.

Life Settlement

A traditional life settlement is the sale of a life insurance policy for a cash payout. It is also known as a senior life settlement, because the policyholder has to be over a certain age to be eligible for the settlement. Depending on the life insurance company, the qualifying age could be anywhere from 65-70. This settlement is usually opted for by those who no longer feel the need for a life insurance policy,  but who could benefit from a cash payment instead.

 

You can choose life settlement providers, or find a buyer for your life insurance policy yourself. When you sell your policy, you transfer the ownership and any death benefits from the policy to the buyer. In exchange, you may either receive a lump sum payment or cash payments in increments.

 

In most cases, the payout received from a life settlement policy is greater than the surrender value of the policy but less than the face value of the policy. If you no longer need your life insurance policy, then selling your policy will get you more cash than surrendering your life insurance policy for its cash value.

 

Unlike viatical settlements, there are no restrictions on how you may spend the money. You may use the payout for medical bills, to repay a debt, pay off your mortgage, or even fund your retirement.

Viatical Settlements vs. Life Settlements

Viatical settlements and traditional settlements have several similarities, but there are certain key differences between the two settlement options. To receive a payout through a settlement, you may need to have permanent life insurance, such as a universal life insurance policy or a whole life insurance policy. A term life policy may qualify for a settlement in certain cases, especially if you convert the term life insurance into a permanent life insurance. You may consult your insurance agent or your life settlement broker to learn about the type of insurance you have and how you can proceed from there.

 

To qualify for a viatical settlement, the policy owner needs a diagnosis of a serious illness from a medical professional. It could be a chronic illness or a terminal illness, with a life expectancy of less than two years – or four years in certain cases. Some of the serious medical conditions that are included are cancer, Alzheimer’s disease, and Amyotrophic Lateral Sclerosis or ALS.

With a traditional life settlement, you need to be over the age of 65 to qualify. You need not be diagnosed with an illness to be eligible, and you can spend the proceeds from a traditional life settlement on things other than medical bills.

 

The financial aspects of viatical settlements and life settlements also vary. Usually, the payout from a viatical settlement is larger than a life settlement. And if you qualify for a viatical settlement, then you need not pay any taxes on the payout you receive, but with a traditional life settlement, your funds may get taxed.

Deciding What is Right for You

If you have decided to sell your life insurance policy, then your best option can only be determined by you – with or without the help of a broker or a life settlement advisor. If you decide to use a broker to sell your life insurance policy, then the broker may be able to get you a far better value for your policy than you would on your own. On the flip side, the broker will charge a commission on the sale of your policy.

 

After you have considered all the implications of selling your policy for a viatical or a life settlement, you can decide what option you qualify for and what is best for you. You can evaluate your medical condition, financial decisions, and any other factor that can have an impact on your decision. You may consult a broker, insurance agent, or a life settlement advisor to understand the process better. Usually, most life settlement companies follow certain general steps:

 

  • Get the necessary paperwork ready for the buyer (life settlement company/broker) – the paperwork includes your life insurance policy papers and your medical records.
  • Fill out the application form. During this step, you will need to provide your basic information, your medical history, and also sign a medical release form.
  • Using the information you have provided, the buyer will decide whether they want to buy your life insurance policy. If they do want to buy the policy, they will make an offer that you can either reject or accept.
  • If you decide to accept the offer, you and the buyer will need to sign the essential paperwork. After the paperwork is completed, you will get an estimated timeline for when you might receive your payout.

 

Whether you choose a viatical settlement or a traditional life settlement – the payout will be much higher than the surrender value of your policy. If you feel that your insurance premium payments are an unnecessary burden, or you need cash to pay for a medical condition – selling your life insurance policy can be the prudent financial decision for

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FAQs

How is a viatical settlement different from a traditional life settlement?

While viatical settlements and life settlements share certain characteristics, they are different from one another. To qualify for a viatical settlement, the policy owner has to be diagnosed with a serious illness that has considerably reduced their life span. To qualify for a life settlement, the policy owner needs to be above the age of 65.

Does the money from a settlement have to be spent on medical bills?

The money from a viatical settlement needs to go towards medical bills or long-term care costs, while the proceeds from a life settlement can be spent in any manner you see fit.

Can I change my mind during the process?

Yes, you may change your mind at any point during the process and not sell your life insurance policy.

If I want to sell my life insurance policy, is taking the help of a broker essential?

No. You may use a broker, sell your life insurance policy to a life settlement company, or find a buyer yourself. Each option has its pros and cons. With a broker, you may get the best possible rate for your policy - but the broker will charge a commission.

Will the money I receive be subjected to taxes?

Maybe. A viatical settlement is usually not subjected to taxes, but if your estate value exceeds a certain amount, then the proceeds may get taxed. A life settlement can be considered as a source of income and may get subjected to taxes. If you are uncertain about whether you need to pay taxes on your settlement, consult a tax advisor.

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