Viatical Settlement

Although life insurance is designed to protect your dependents and loved ones from financial devastation in the event of your death, certain circumstances warrant the need for access to the policy’s value before the owner dies.

A viatical settlement is a legal, financial agreement that allows a terminally or chronically ill policyholder to sell their life insurance policy to a third-party buyer and gain access to the policy’s funds while they are still alive.

The viatical settlement buyer becomes the policy’s new owner, paying any required premiums and receiving the full policy benefit when the original insured ultimately dies.

A 1911 ruling set by the U.S. Supreme Court first made viatical settlements possible. But the AIDS epidemic of the 1980s galvanized the practice when many life insurance policyholders needed money for medical treatment while still alive.

The National Association of Insurance Commissioners (NAIC) first adopted the Living Benefits Model Act in 1993 and has modified the Act extensively since.

The original policyholder, called the viator, sells their life insurance policy to a third party for less than the market value of the policy but more than the policy’s cash surrender value.

The viator will typically receive 50-70% of the policy’s face value as a lump-sum payment, usually within weeks. When the insured dies, the death benefit goes to the third-party buyer instead of to the viator’s original beneficiaries.

Viatical settlements, like other insurance products, are regulated at the state level. The National Association of Insurance Commissioners (NAIC) provides model regulations designed to inform state laws. According to the Life Insurance Settlement Association (LISA), 43 states and Puerto Rico have their own protective regulations in place.

State regulations define different requirements for eligibility. In most states, the viator must have a current life insurance policy with a face value of $100,000 or higher and have held it for a minimum of two years. Some states require the policy to be held for at least five years, so be sure to check your state’s individual life insurance regulations.

In addition, the viator must be terminally or chronically ill.

For the purposes of a viatical settlement, terminally ill means the viator has a life expectancy of 24 months or less as certified by a physician.

Chronically ill generally means the viator cannot perform the day-to-day tasks of life without help. Some states include those with cognitive impairments requiring supervision as chronically ill.

Because each state has its own rules and guidelines surrounding the definitions of these terms, individual research on a state-by-state basis is important when evaluating viatical settlement eligibility.

The buyer in a viatical settlement generally falls into one of three categories: viatical settlement companies, who specialize in viatical purchases; viatical settlement brokers, who work in conjunction with buyers and sellers to draw contracts; or private investment companies or individuals. Each of these parties will have different policy minimums and different investment horizons.

Settlement payouts generally fall between 50-70% of the policy’s face value, but the type and face value of the viator’s life insurance policy will significantly influence the payout they receive. Each third-party buyer has its own payout procedures and requirements for eligibility.

Most permanent or whole life insurance policies are eligible for viatical payouts. Some term life policies might also qualify, though potentially at a lower rate.

The buying company also considers the viator’s age, diagnosis and prognosis when determining a payout.

Deciding to sell your life insurance policy is a serious decision with both financial and emotional implications. Considering the advantages and disadvantages in terms of your circumstances and the weight of your financial needs is important.

To be considered a viatical settlement, the policy seller can be any age but must be terminally ill, with a life expectancy of less than two years, or chronically ill, meaning they are unable to perform basic day-to-day activities without help. A viator can sell a term, whole life, universal, joint or group policy.

When a healthy senior wants to sell their life insurance policy, on the other hand, the agreement is called a life settlement. Life settlements are typically an option for those over 65.

Individuals may consider a viatical settlement to obtain the funds needed for experimental treatments, to cover medication costs or to finance end-of-life care. Some viators might need to make structural accommodations to make their living space more accessible. Others might want to share money or experiences with family and friends while they can enjoy them. No matter the reason, the option exists to provide access to funds for the chronically and terminally ill.

Although it’s a highly personal choice, choosing a viatical settlement should follow consultation with your life insurer, estate lawyer or another trusted financial advisor. It is also wise to discuss the idea with family and with the original beneficiaries who may be affected.

The NAIC provides a pamphlet to address the initial questions and concerns you may have.

A viatical settlement is not the right choice for every individual in every instance. But if it can make a viator’s last days more comfortable and worry-free, it may be an appropriate option.