Viatical Settlements Explained
A viatical settlements are a financial arrangement in which someone close to death, almost always suffering from a terminal disease, sells their life insurance policy for a smaller sum than its payout would be upon the insured’s death. This makes it potentially attractive to buyers, who, although they continue paying the insurance premiums, become the new beneficiaries of the policy and receive the payout upon the previous owner’s death. This kind of settlement provides the seller with a quick source of cash for their end-of-life wants and needs, such as covering the costs of medical or palliative care, funding their final dreams, and so on.
Viatical Settlements or Life Settlements?
Viatical settlements are also sometimes called life settlements. They are indeed similar, but there are a few important differences. First, life settlements are usually sought by people over the age of 65 – essentially, retirees. People enter into viatical settlements, on the other hand, if they’re suffering from a disease such as terminal cancer, autoimmune diseases, or other terminal illnesses and who have little time left to live. These can be 30 or 40 year-olds, and the viatical settlement industry first took off during the AIDS crisis of the 1980’s, when many insured and relatively young people were dying from the disease. With no wives or children (in most cases, these were well-off gay men) to support, and with parents who did not need money, these sufferers sold their life insurance policy to allow them access to the things they wanted or needed when facing their death. The money they received could pay for medical care that would allow them to live their remaining days more comfortably, palliative or hospice care that would allow them to pass in a dignified way, or simply extra spending money to do what was on their “bucket list.”
Since then, the viatical settlement industry has grown and developed, with more and more people with terminal illnesses or a short time to live opting to sell their life insurance policies for sums that are less than the payout for their death would be, but higher than the cash surrender value offered by their insurance company.
The Right Candidates for a Viatical Settlement
For a person with life insurance who is suffering from, for example, terminal cancer to be a viable candidate for a viatical settlement, they must meet certain criteria. The most important criterion is life expectancy. A terminally ill person is defined as a person with a life expectancy of 24 months (2 years) or less. A special underwriting company determines the seller’s life expectancy after gaining access to the seller’s medical records. The underwriting companies also have access to historical life expectancy records as well as the actual amount of time that previous sellers with similar illnesses have lived after concluding a viatical settlement.
Determining life expectancy – as the term itself implies – isn’t a process with an accurate and certain result, which is why potential buyers prefer sellers who are terminally ill with as little time left as possible. This means that the policy will “mature” faster and bring the buyer a payout sooner. It’s simply a business fact of this industry that the closer a life insurance seller is to death, the more valuable their life insurance policy will be.
Pre-Deal Homework and Research
With that said, any prospective seller of their life insurance policy should do a good deal of research and homework before engaging any potential brokers or buyers. Unethical brokers and policy buyers tarnished the public image of the viatical and life settlement industries in the early days. Due to a combination of these scandals and the fact that these industries profit from death – something many people are, understandably, uncomfortable with – this public image still has not completely recovered.
Nevertheless, a viatical settlement is a viable financial engagement for many terminally ill individuals who need cash to cover expenses or fund their final dreams. Unfortunately, it is not a viable engagement for all terminally ill individuals. Due to the relatively small (though growing) size of the viatical settlement market in the US, you should look for a financial advisor who has experience with or understanding of the viatical and life settlement markets. They will be able to go over the numbers with you and tell you what your best options are.
For example, it may be more lucrative to opt for the cash surrender option offered by your insurance company. A 2009 study by the Senate Special Committee on Aging, however, concluded that life settlements yield, on average, eight times more on average than a cash surrender option. And a 2002 study reported that out of those hospice financial counselors who had experience with viatical settlements, most reported positive outcomes. If you choose your broker and buyer wisely, you can get a considerably larger sum of cash than offered by your insurance company as compensation for surrendering your policy.
The pre-deal “homework” should include researching brokers, finding out the commission they take – in most states, this is capped at 30% of the final payment – and negotiating for as good a deal as you can get. It can be beneficial to just work with one broker, so choosing the right borker is vital. Ask them to show you, in writing, the offers they get from potential buyers so that you can do the math by yourself or, preferably, with a trusted financial advisor. The states of California, Washington, and New York have the strictest regulation on viatical settlements. If you want the safest viatical settlement experience, consider going with brokers and companies licensed to do business there.
Often consulting a life settlement legal professional can help direct you to the right resources.
Unless you’re in dire need of cash as fast as possible, you should invest time into your hunt for the best deal. A viatical settlement reached in a couple of weeks is not going to give you the best deal you can get. When negotiating, don’t accept anything less than the whole sum upfront – being paid in installments is a risk you shouldn’t take.
Finally, go over the tax implications of a viatical settlement, as well as how it might affect your eligibility for various government programs. A large amount of money appearing in your bank account might mean, for example, that you are not eligible for Medicaid or other assistance programs. If you’re dealing with something like terminal cancer, which makes you eligible for some Medicaid benefits in some states, that might be a dealbreaker.
Viatical settlements can be a relatively straightforward process with a lucrative payout, and by now many financial advisors and other specialists have heard of or had experience with them. But getting the best deal possible requires the seller to invest a bit of time and effort by comparing offers, brokers, and doing the math – that’ll get you a long way towards concluding a successful viatical settlement. Good luck!