You may have seen advertisements for life insurance settlements which are the sale of your existing life insurance policy for cash. They are a great way to utilize an insurance policy asset while still living. What are viatical settlements, are they the same thing?
Life Settlement vs Viatical Settlements
A viatical settlement is defined as a financial transaction in which a viatical settlement purchaser buys ownership and beneficiary rights to a life insurance policy insuring an individual with a chronic or terminal illness for a percentage of the policy’s face value. The buyer also takes over responsibility for premium payments. This sounds a lot like a life settlement. In fact, the transaction itself is essentially the same.
Life settlement and viatical settlement are terms that are often used interchangeably. Both describe the sale of an existing life insurance policy to an investor for a lump sum of cash. The main difference between a viatical settlement vs life settlement is the life expectancy of the insured. In a viatical settlement, the insured has a life expectancy of two years or less. Actuarial companies use existing medical records along with mortality tables to calculate an estimated life expectancy. If the life expectancy estimate exceeds two years, then the transaction will fall under the term “life insurance settlement.” A terminal life expectancy, under two years, will fit the viatical settlement definition.
Another key difference between viatical vs life settlements is viatical settlement taxation. In a life settlement, the seller is typically responsible for taxes on any proceeds received in excess of the amount equal to premiums paid on the policy. In a viatical settlement, proceeds are not taxed. It is always advisable to consult with your trusted tax professional prior to accepting a viatical settlement offer.
Does the viaticals definition differ from the viatical settlement definition? Both are terms for the same financial arrangement. What is the correct viatical pronunciation? vi·at·i·cal, vīˈatikəl
Creation of the Viatical Settlement Industry
Viatical settlements provide a way for individuals to cover assisted living and home health care costs, medical expenses, treatments not covered by insurance, or the cost of day to day living. Sometimes, individuals sell policies simply to have money to enjoy the time they have left with family.
What disease prompted the creation of viatical settlements? Viatical settlements first developed in response to the AIDS epidemic. Newly diagnosed HIV positive individuals needed funds for treatment. Experimental treatments surfaced, but were quite expensive and cost prohibitive. Since no treatment had been approved as the standard, most costs were not covered by health insurance.
The secondary market for life insurance was created as a way for people to gain access to the value of their life insurance policies while still alive. By selling their existing life insurance policy to an investor, they received a lump sum of cash, benefiting from the policy while still living rather than through death, and gave up responsibility for premium payments. This form of investing was attractive to investors as it was presumed that return on their investment would be realized in a brief period of time.
Fortunately, for many AIDS patients, new treatments and medical advancements resulted in a much longer lifespan than originally thought.
Are Viaticals Legal?
In 1911, in the U.S. Supreme Court case of Grigsby vs. Russell, it was ruled that ownership of a life insurance policy may be transferred to a third party investor. A patient sold his life insurance policy to his doctor in order to pay for a necessary medical procedure for which he could not afford to pay in cash. Selling your policy in a life settlement or a viatical settlement is legal and is your right. A life insurance policy is a financial asset that can be sold.
While the case mentioned above was ruled as legal and valid, modern viatical settlement purchasers must be accredited investors in order to make this type of investment.
Who Can I Contact About Viatical Settlements?
If you feel that you may benefit from a viatical settlement, you may contact a viatical settlement company. A viatical settlement broker will send packets of information about your policy, such as insurance illustrations, and information about your health, such as medical records and a life expectancy report, to prospective buyers. These viatical settlement buyers will use the information to calculate a value for your policy and if value is found, they will make a cash offer to you.
Companies that represent these buyers are known as viatical settlement providers. Provider companies seek out policies that will best fit the investment needs of the life settlement funds that they represent. These companies will also assist with the contract closing process should you choose to accept a bid for your life insurance policy.
How Do I Know If I Qualify?
Unless you have a terminal diagnosis and life expectancy estimate of two years or less from your physician, you may not know initially whether or not you qualify for a viatical settlement. Don’t worry. Through the settlement process, your life expectancy will be estimated by a life expectancy report company. The result will determine whether or not you qualify for a tax-free viatical settlement or in the case that your life expectancy is a little longer, a life settlement. In either situation, the transaction process is the same.
If you are in need of funds, a viatical settlement is worth investigating. When dealing with illness, finances can be an unwelcome burden when healing and enjoying life as much as possible should be the main focus. Never surrender or lapse your policy without first checking into viatical settlement solutions as a settlement may be a way to provide some much-needed relief to you and your family at a time that you could use it the most.
