Viatical Settlements Explained
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What is a viatical settlement?
A viatical settlement is the sale of an existing life insurance policy, by someone who is terminally or chronically ill, to a third party for more than its cash surrender value but less than its face value, or death benefit. Viatical settlement is the specific term used to define a life insurance settlement where the insured party is terminally or chronically ill.
In this sense there are actually 2 types of viatical settlements. The first is for someone who is terminally ill. Terminally ill is defined as having a life expectancy of less than 24 months. The second is for someone who is chronically ill. Chronically ill is someone who can no longer perform two or more of the following activities; eating, using the toilet, bathing oneself, or dressing oneself. Chronically ill also describes someone who requires substantial supervision to protect him/herself from threats to health and safety.
In a viatical settlement transaction the life insurance policy holder transfers ownership to a third party. The former policy holder is no longer responsible for the policy premiums and receives a cash payment that’s larger than the surrender value of the policy. The third party, known as a viatical provider, is now responsible for all expenses related to the policy.
While the viatical settlement process is very similar to that of life settlements, there are a few key considerations for viaticals that we have highlighted in the sections below.
If you are looking for information regarding the transaction process, how policies are valued, or settlement information for someone who is not terminally ill we encourage you to read our life settlement overview.
Am I eligible for a viatical?
Health: Viatical settlements are for people who are terminally or chronically ill. Generally this means a person with a limited life expectancy. You will need your attending physician to write a letter verifying that you have a terminal or chronic condition.
Policy Type: Universal, whole, and term life insurance policies are all candidates for a viatical settlement. The majority of the policies that get transacted are universal life.
Policy Size: Policy size should be at least $50,000 in face value.
Does a viatical settlement make sense?
Consider selling your life insurance when:
You can no longer afford your insurance premiums. A viatical is a great way to avoid letting your policy lapse if you can no longer afford the premiums which can often be the case with increasing medical bills. Letting your policy lapse can lead to little or no payout depending on the policy type.
You no longer need to protect against income loss. Another reason to sell your life insurance is that you no longer have a spouse or children that would be dependent on the claim in the case of your death.
Your term policy is approaching it’s expiration date. Term policies typically expire with no cash value and expensive replacement costs. If your term policy expires in the near future it may make sense to convert it into permanent insurance and then engage in a settlement.
You are looking to enjoy your last days. A viatical settlement allows you to supplement your income so that you can really enjoy the rest of your living days. Take on your bucket list.
Accelerated Death Benefit
An Accelerated Death Benefit (ADB) rider lets you use the money that is allocated for your death benefit before you die. It is often referred to as a living benefit for that reason.
At this point ADB is a standard in the insurance industry and is offered by most life insurance providers. If your policy doesn’t explicitly mention the ADB rider it is definitely still worth calling the carrier and inquiring directly.
Generally, you can get part of the face value of your insurance policy if you have a terminal illness. Every life insurance provider has different rules around how much of the death benefit can be accelerated and the exact circumstances for the policyholder to be eligible.
We encourage all terminally or chronically ill people looking into a viatical settlement to explore their ADB options first. The ADB option will likely be faster and have a more favorable payout.
If some or all of your policy face value is not eligible for accelerated death benefit you can sell the remaining face value in a viatical settlement.
How are viatical settlements taxed?
One of the major advantages of a viatical settlement over a standard life settlement is the tax treatment of the proceeds.
For a policyholder that is terminally ill, the viatical settlement payout is often entirely tax free.
For a policyholder that is chronically ill, the viatical settlement payout is generally tax free only for proceeds used to pay for long-term care services that are not compensated by insurance. Other uses of proceeds are subject to standard life settlement taxation.
And please keep in mind that Mason Finance does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
How are viatical settlements regulated?
Viatical settlements are regulated by each state through their respective departments of insurance.
Today, 45 states and Puerto Rico have comprehensive viatical settlement laws and regulations. This means that more than 90% of the US population is protected by state regulations. It is worth noting that both Michigan and New Mexico regulate viatical settlements but not standard life settlements.
Most regulated states closely follow the National Conference of Insurance Legislators (NCOIL) Life Settlement Model, the NAIC Viatical Settlement Model, or some combination thereof. Importantly, the NAIC Viatical Settlement Model suggests minimum payouts depending on the life expectancy of the policyholder.
One of the key things that viatical settlement regulation covers is how long a policy owner must have owned their policy before they are eligible to sell. Most of the regulated states have a two year waiting period but if you want to know the specifics for your state you can check out this life and viatical settlement regulation map. Many states do have do have provisions that allow people to sell their policy before the end of the waiting period in the case of terminal illness.
Another major part of viatical settlement regulation is transparency. States that have comprehensive regulation require that policy owners receive substantial disclosure- including the disclosure of compensation paid to brokers.
In addition to disclosure of broker compensation, most states also require that policyholders receive all offers and counteroffers, information on the alternatives to a viatical settlement, and are told about the risk pertaining to taxation and government assistance programs.
Another important thing that states with comprehensive regulation require is the licensing of both viatical settlement agents, brokers, and providers.
The history of viatical settlements
Viatical comes from the latin word viaticum which means a supply of provisions or an official allowance of money for a journey. The name makes sense given that viatical settlements provide much needed cash to terminally ill policyholders. A viator is a policy owner who sells their life insurance policy death benefit to a third party.
While the concept of selling life insurance to a third party is not a particularly new one, the first organized efforts to support the settlement process began in the mid 1980s. A small group of funding firms, backed by financing capital, realized that a rising number of AIDS patients needed cash today but had large insurance policies. These policyholders theoretically had short and predictable life expectancies.
Ultimately, medical advancements made viatical settlements for AIDS patients far less common over time. But out of the 80’s was born the highly regulated and mature life and viatical settlement industry that exists today.