Did you know that over $115 billion of life insurance policies owned by individuals over the age of 65 lapse annually, with the money policy owners had spent being forfeited to the life insurance company? Sometimes people are terminally ill or so sick that they can no longer pay their life insurance premium each month. Instead of letting their policy lapse, they should have asked, “What are viatical settlements?”
If someone has heard of viatical settlements and have some familiarity with them, they usually ask viatical settlement providers:
- How do you buy viatical settlements?
- Can I actually sell my life insurance policy?
- Is selling term life insurance policy for cash possible?
These are all excellent questions and will be answered here. But, let’s start at the beginning with the question that is most often asked:
What Is a Viatical Settlement?
The best definition of a viatical settlement is that it’s the sale of a life insurance policy by its owner to a buyer for a lump sum of cash. The policy owner will most often use a viatical settlement provider to locate prospective buyers, get the best offer for their policy, and facilitate the sales process through to completion.
With viatical settlements, the insured person needs to be diagnosed with a terminal illness and have a life expectancy of 24 months or less. They can also qualify by having a chronic illness that leaves them unable to do at least two activities of daily living (eating, bathing, toileting, or dressing). Someone also qualifies as chronically ill if they require near constant supervision to protect themselves from actions they might take that would adversely affect their safety or health.
Viatical settlements have dramatically increased in popularity over the years, prompting state and federal governments to increase protection for consumers. The Health Insurance and Accountability Act of 1996 (HIPAA) is at the heart of these efforts.
HIPAA is in place to protect policyholder’s rights. It allows them to safely sell their life insurance policies to a third party, which is allowable because life insurance is considered real property, and its ownership can be transferred. Because of HIPAA and other regulations, consumer protection with viatical settlements has increased, making them more attractive investments.
In the year 2008, the historic financial crisis had a short-term negative effect on viatical settlements. Because the situation led to a marked decline in the number of financial resources that many people could depend on, there were fewer investors with enough liquidity to buy life insurance policies.
To make matters worse, new financial regulations were enacted by state governments that made it more difficult for people to engage in the buying and selling of life insurance policies. Fortunately, the effects weren’t lingering as financial institutions made money more available again, and as a result, the use of viatical settlements once again continued to grow.
The aging of the population has contributed to the increased popularity of viatical settlements. Typically, major health problems develop after age 55, with aging adults developing illnesses such as cancer and diabetes. Because of this, many people need additional funds to pay for expensive medical procedures, treatment, and medication. Viatical settlements have been of great benefit to many chronically ill people because it helps pay costly medical bills.
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Qualifying For a Viatical Settlement
Qualifying for a viatical settlement is very straightforward. Here are the parameters:
- The life insurance policy must be at least two years old
- The policy must have a face amount of at least $100,000
- The insured must have a life expectancy of 24 months or less or have a chronic illness (as described above)
Qualifying for a viatical settlement doesn’t automatically mean that the policy will be sold. Buyers are going to take many factors into account, including:
- The policy’s monthly premium
- The health disorder the insured has
- The stage of the illness (if applicable)
- Outstanding loans against the policy
After visiting with you, a viatical settlement broker can give you a good idea of your life insurance policy’s marketability and what you could expect as far as offers for your policy. They’ll also disclose to you what their fee structure is.
Viatical Settlements vs. Life Settlements
There is much confusion as to the differences between viatical settlements and life settlements.
The commonality between the two is that a life insurance policy is sold to a third party with both types of settlements.
They differ in the respect that the insured does not need to be terminally or chronically ill with a life settlement. They can be in perfect health and sell their life insurance policy.
Another difference is their purchase value. It’s higher with viatical settlements because with the insured having a shorter life expectancy, their policy is more attractive to potential buyers.
The Taxation of Viatical Settlements
In most instances, the payment that a seller receives from the sale of a life insurance policy is not subject to federal taxes, the same as it is with death benefits received by a beneficiary. This applies to money being received because the insured is not expected to live for more than two years.
Taxation differs for someone receiving proceeds because they are chronically ill. If the recipient uses all of the money for long-term care expenses, no tax would be due. However, if only a percentage of the money received from the sale is used to pay long-term care expenses, the balance may be subject to taxation.
When it comes to viatical settlements’ current tax status, the Internal Revenue Service is the best source for information. Before ever selling a life insurance policy, policy owners are advised to talk with a tax professional to confirm current state and federal tax status.
In some cases, state taxation regulations may be different from federal tax regulations.
About Viatical Settlement Providers
It is generally agreed that a person selling a life insurance policy without utilizing a viatical settlement provider’s services is at a distinct disadvantage.
Contacting and utilizing a viatical settlement provider helps the seller of the policy make better financial decisions. Because of the network of potential buyers a reputable viatical settlement provider has developed, there will be more offers for the policy being offered for sale, and these offers will be higher than if the seller had negotiated on their own.
Different states have different requirements regarding licensing for viatical settlement providers. Because of the complexity of viatical settlements, some states even require policyholders to work with a viatical settlement provider for their protection.
When considering viatical settlement providers to work with, policy owners should consider:
- The services offered by the viatical settlement provider
- Their fees
- If they have any necessary insurance that is required
- Confidentiality policies
- Length of time in business
- Number of successful transactions
Reputable providers will spend as much time as a potential client needs to address these areas and any concerns or questions they might have, such as, “What are viatical settlements?”. They will also provide references if you request them.
When to Consider a Viatical Settlement
There are many reasons that people pursue viatical settlements. Many times, it’s because they need funds to pay for medical bills or end-of-life expenses. These are some of the most common situations that motivate people to seek a viatical settlement:
- They aren’t able to pay the premiums any longer. The high cost of health care and the associated bills for doctors, hospitals, and medications make it impossible for some people to continue to pay their life insurance premiums. They choose a viatical settlement because they can get a timely cash payment and get relief from paying monthly life insurance premiums.
- Their beneficiaries no longer need the death benefit. The most significant reason people buy life insurance is to leave money behind for their loved ones when they pass away. As time goes on, mortgages get paid off, children graduate from college, and retirement savings grow to the point where the life insurance death benefit is no longer needed.
- Their term policy is about to expire. Though many people think that only whole life or universal life policies can be sold with a viatical settlement, selling a term life insurance policy is an alternative. The term policy needs to be converted to a permanent policy, which is then marketable to potential buyers.
- They want to enjoy the remainder of their life. When someone is told they have less than two years to live, their priorities often change. Visiting cities and countries they’ve never been to, traveling to see their kids and being there to spoil their grandchildren, buying something they’ve always wanted, or just living in greater comfort are things they want to do that may require more money than they have. Viatical settlements provide the funds they need to enjoy the rest of their life.
The Risks of Viatical Settlements
Any type of investment or financial transaction carries some risk. Even though there can be a substantial selling price for a policy, it’s essential to know the risks before proceeding.
Older permanent life insurance policies that the owner has been paying premiums on for many years may have accumulated enough cash value to make it worth more than the policy could be sold for. Chronically ill patients may have a long enough life expectancy that alternative investments would provide a better return than selling their policy. In both of these cases, a viatical settlement may not make good financial sense.
Though the IRS doesn’t usually have policy owners that have sold their policy pay taxes on the proceeds, every situation is different. Each state has different rules concerning the taxation of viatical settlements. A professional should be consulted to find out how a potential settlement could be affected.
Transparency concerning fees by the viatical settlement provider is critical. Sellers need to be aware upfront of all fees and commissions that would affect their payout.
Creditors could possibly claim some or all of the money received in a viatical settlement. A seller with outstanding debts should talk with their financial institution to determine if their payout is at risk.
Alternatives to Viatical Settlements
For someone who doesn’t qualify for a viatical settlement or just isn’t sure if it’s right for them, there are several alternatives to get money from their life insurance policy.
One alternative is a policy loan. There is interest charged on policy loans, but because there is no underwriting required, the money can be accessed quickly. If the loan isn’t paid back by the time the insured dies, the outstanding balance will be subtracted from the death benefit.
Another option is using an accelerated death benefit rider if the policy already has one. With this rider, the insurer pays a portion of the death benefit while the insured is still living.
Finally, policyowners can surrender their life insurance policy. They’ll stop paying premiums, and the life insurance company will calculate the surrender value, which will then be paid to the policyowner.
Viatical Settlement Questions and Answers
What if someone isn’t terminally ill but wants to sell their policy?
Instead of using a viatical settlement, the policyowner would pursue a life settlement because their life expectancy is more than two years.
After the policy is sold, who pays the premiums?
After the sale is closed and the seller receives a check, the new owner will pay future premiums and will receive the death benefit when the insured passes away.
Are viatical settlements regulated?
Viatical settlements are regulated in 45 states and Puerto Rico. This covers over 90% of Americans with life insurance.
Someone told me viatical settlements are illegal. Is that true?
It’s possible that the person who told you that doesn’t understand viatical settlements. Viatical settlements are entirely legal and greatly benefit people who need money to meet their needs.
Will it cost me anything to see if I qualify for a viatical settlement?
No, a reputable viatical settlement provider will not charge you for consulting with them about your particular situation. If the question “What are viatical settlements” hasn’t been answered for you, consult with a viatical settlement provider who will spend time answering that question for you and any others you might have.
Don’t lose your lifelong investment. Discover your policy’s value today.