Understanding life insurance settlements can be difficult, just like understanding many other insurance topics. However, if you’re considering a life settlement of any kind, you may want to read on. Understanding the difference between a viatical settlement vs. a life settlement is crucial to making the right decision for you.
Viatical Settlement vs. Life Settlement
What Is a Life Settlement?
First of all, what is a life settlement? In short, it’s a decision to sell your life insurance policy to a third-party buyer for cash value, usually between 10% and 30% of the death benefit. People make this decision all the time–there are many good reasons for it.
For example, you might be in need of money for some medical treatments. You might want to start up a dream business and need some capital to get it going. You might want to take a well-deserved vacation but are short on cash.
Or maybe your beneficiaries are independent and have no need for the insurance protection. Or perhaps you can no longer afford the premiums. Whatever the case, a life settlement can be a great financial decision.
There are a few options when it comes to life settlements. You can get:
- A traditional settlement in which you sell your insurance policy for a cash amount greater than that of the surrender value of your policy (what you get if you cancel and surrender it to your insurance company) and stop paying any premiums.
- A retained benefit settlement in which you retain part of the benefits for your beneficiaries but don’t have to pay any more premiums.
- A hybrid settlement is a combination of a traditional and retained life settlement in which the proceeds of the policy sale is part cash and part retained benefits.
Whichever you choose, you’ll get a bunch of cash in your pocket and be freed up from paying hefty premiums for the rest of your life.
What Is a Viatical Settlement?
A viatical settlement is a life settlement option specifically for those suffering from chronic illness or a terminal disease.
The requirements for receiving a viatical settlement are a bit different than a life settlement, specifically you must be chronically ill or terminally ill. All of the same criteria for policy qualification for a life settlement also applies to viaticals. Whole life, universal life, and convertible term policies with benefits of $100,000 or higher are all eligible. However, for a viatical settlement most funds will also consider non-convertible terms and group policies. In addition, for viaticals most regulations allow exceptions to the prohibition of policy sales during the contestability period, typically the first two years after issuance.
When you receive a terminal diagnosis, it is common for priorities to shift in marked ways, both personally and financially.
Most have specific things they would like to do, whether paying off debts or family related activities such as trips or simple gatherings. There are extensive costs with living chronically or terminally ill, such as medicines and treatments, hospital visits, surgeries, etc.
Whether you are looking for ways to free funds for your priorities like paying down debts, funding the cost of nursing care or assisted living or evaluating modifications to your home for accessibility, choosing a viatical settlement could be the way to go to get the money you need.
Don’t lose your lifelong investment. Discover your policy’s value today.
The Viatical Process
If you decide to pursue a viatical settlement, there are a few ways to approach the marketplace. The process will take from two to three months, and much of that time is devoted to collecting information for underwriting.
- First, decide if you would like to utilize the service of a broker or work directly with a purchaser. When working with a broker, understand how the cost of services will be determined prior to getting started.
- In either approach, the first step will be to gather information on both the policy and the insured. For the policy, information related to the product features and ongoing costs will be requested from the life insurance company. For the insured underwriting, medical records will be collected from physicians.
- Once all of the underwriting information is gathered, the policy will be priced and an offer extended. Take note of timelines, as typically offers are extended for specific periods of time. Be sure to understand if the offer presented is gross or net of any fees, such as commissions.
- If you accept the offer, you will be presented a contracting package that includes an application, purchase and sale agreement and escrow agreement. Once signed, the purchaser will complete diligence and fund the escrow. Once change of ownership and beneficiary are confirmed, the escrow will release funds as you directed in the contract.
Taxation of Viatical Settlements
The sale of a life insurance policy is the sale of a financial asset. When dealing with viatical life settlements, you’ll want to look into the tax implications ahead of contracting. In general, the IRS does not tax qualifying viatical life settlements, but you may have to deal with taxes in your state. It’s best to check with a tax advisor to determine whether or not your viatical settlement will be taxed.
FAQ On Viatical Life Settlements
How much do I have to pay?
A: To obtain a viatical settlement, you do not have to pay any fees. You must keep your life insurance in good standing, which means paying premiums due during the process.
Who buys life insurance policies?
A: In most states, a life settlement is purchased by a licensed buyer, referred to as a provider. Providers typically represent institutional investors with purchased policies pooled into portfolios.
What is the downside to a viatical settlement?
A: There are a few cons to look out for when pursuing a viatical settlement. Check with your tax advisor to understand any tax consequences. Any sale may impact qualification for Medicaid benefits. Of course, when you sell the policy your beneficiaries will no longer receive any death benefits.
Why should I choose a viatical settlement vs. a life settlement?
A: If you do not qualify for a viatical settlement, you may still qualify for a life settlement. Typically those with life limiting medical conditions, those suffering from a chronic or terminal illness, will qualify for a viatical settlement. Because of this, the average purchase price for a viatical settlement is much higher than the average life settlement.