Viatical Settlement in Times of Need
Viatical settlements are in reference to the sale of someone’s life insurance policy who has been diagnosed as terminally ill with a life expectancy of 24 months or less.
The person who is sick will sell their policy to a viatical settlement provider that is specifically licensed to do the transaction. The provider is usually executing the transaction on behalf of an investor funding the viatical settlement.
They will offer a lump-sum cash payment equivalent to a percentage of the face value of the life insurance policy. Some states have regulations regarding minimum settlement amounts, which can be as high as 80% of the face value of the policy for terminally ill “viators.”
The main reason that people in this type of situation sell their insurance policies is because they need to use their money before they pass away instead of leaving it to a beneficiary. Some specific reasons many people do this is to pay for medical care, living expenses or to make memories before dying.
Another type of similar transaction is a life settlement. This transaction is virtually the same, only the “settlor” or seller of the policy has a greater than 24 month life expectancy. Settlement amounts are often 6-8 times higher than the cash surrender value that a carrier is willing to give. In many cases, people no longer needing or who are unable to afford their policies just stop paying on them, causing them to lapse into worthlessness.
Life and viatical settlements enable the policy owner to realize value where they might have previously thought none existed, thereby improving their financial condition while they live.
What you will learn:
Who Is Able To Buy Life Insurance Policies?
As stated earlier, policies are typically bought by viatical and life settlement providers. They are able to buy policies using funds provided by investors or loans from other financial institutions. According to the Internal Revenue Code, a provider of a viatical or life settlement is a person or business that regularly buys or takes ownership of contracts of life insurance policies. The purchaser will make a profit by getting the full face value of your policy once you pass away, even though they only paid you a portion of it. This is because they have to keep the policy in force by paying the premiums until it matures. It is important to note that once you sell your policy, your beneficiaries will no longer get a payout once you pass away. Most reputable viatical or life settlement providers require beneficiaries to acknowledge the settlement before any money is paid to the seller of the policy.
How Much Is My Life Insurance Policy Worth?
The amount you will actually receive is going to depend on a number of factors including how much your policy is worth, how much the company will spend on your insurance premiums, and your projected life expectancy. Typically, the longer you have left to live, the less you will be given for your policy.
How To Pick the Best Viatical Company?
Viatical and life settlement companies or individual providers need to be licensed or registered with a state’s department of insurance. Only 7 states in the U.S. are not regulated. However, settlements can still be effected in those states, and most providers use best practices where no regulations exist.
Before selling your policy to a provider, be sure they are licensed or registered, where applicable, to legally buy your life insurance policy in your state as well as what the state’s requirements may be. This is important for many reasons, not the least of which is because it may play a big role in whether or how the sale of your life insurance policy is treated for tax purposes. In addition, you need to be certain if there are any other fees involved with the sale after you sell it. Always consult a professional when considering the sale of your policy.
Should You Consider Selling Your Life Insurance Policy?
Selling your policy is a personal decision and there is no single correct answer. Below are some important factors to consider first:
- Are their any tax penalties for selling the policy?
- Are your beneficiaries aware of your need to sell your policy?
- Are there other ways to get the money you need for living expenses until you pass?
- Does your policy include a living benefit rider or an accelerated death benefit rider?
Income Tax Penalty Considerations
In a lot of cases, if you are terminally ill and have less than two years to live, you can sell your life insurance policy without any tax penalties. In other cases, if you have been diagnosed as chronically ill and not terminally ill, the funds you receive may only be tax free if you use them to pay for qualified long-term care services.
Again, always consult a professional if you have a policy you do not need or cannot afford, and you wish to realize its true value while you live.
We do our best to make sure our loved ones are cared for after we’re gone, and life insurance policies offer us one way to do that. But coming face to face with a terminal diagnosis can shift the tides and make a living benefit a better option than your loved ones collecting a death benefit.
When you sell your policy through a viatical settlement, your beneficiaries will not receive the life insurance policy payout upon your passing. Rather, the third party to whom you sold the policy becomes the owner and collects the full face value. You do, however, receive a lump sum that exceeds the cash value while you are still living and you can use that money however you see fit.
How Do Viatical Settlements Work?
When considering taking a living benefit instead of a death benefit, one option is to access the cash value buildup inside the policy. But when that amount isn’t enough, a better option can be something called a viatical settlement. A viatical settlement occurs when a policy owner who is terminally or chronically ill with a life expectancy of 24 months or less sells his/her life insurance policy to a third party. You might wonder why this is preferable to simply surrendering the policy. Typically, a policy is purchased for a much larger amount than the cash surrender value.
Uses for Viatical Settlement Money
Life insurance policies are often sold for a viatical settlement when money is needed to pay for medical expenses, changes to a home to accommodate a chronically ill patient or for personal uses, like a once-in-a-lifetime trip with loved ones.
Viatical Settlements and Taxes
Anyone considering a viatical settlement should consult a tax advisor. Generally, you are able to collect your viatical settlement with no income tax ramifications. Under the Health Insurance Portability and Accountability Act, viatical settlements are income tax free to the seller.
Other Information to Know and Features of a Viatical Settlement
There are viatical settlement requirements regarding the total value of your policy. In most cases, a policy must exceed $100K in face value to be eligible for a viatical settlement. Additionally, most states require that a policy must be owned for at least two years before a policyowner can sell it. Some states require ownership of a policy for five years. In regards to health status, the third party provider who is interested in buying will require signed forms that allow them to get access to health information on your behalf.
Make sure you understand the limits of this permission before you move forward. There may also be a minimum amount that the provider must pay for your viatical settlement. Some states regulate minimum payments for viatical settlements in order to protect the consumer.
For example, Viatical settlements can offer meaningful, timely solutions for terminally or chronically ill patients in need of additional funds. Talk to your family about how a viatical settlement might help you and your family get on a firmer financial foundation during a time of need. Sometimes a living benefit today can outweigh the death benefit that will be collected someday.
Learn how much your policy is worth today using our Free Life Settlement Calculator today!