Could I benefit from a viatical settlement?

If you have a terminal illness or have struggled as mounting medical bills deplete your retirement savings, you may have considered using a viatical settlement to tap into the wealth stored inside your life insurance policy.

Indeed, as many of America’s seniors struggle amid turbulent financial times, viatical settlements have increasingly been proven to be a great source of immediate cash — particularly for those who have assets but have no income.

If you’re considering a viatical settlement, we’ve put together a short guide to viatical settlements, including what they are, how to get one, and things to be aware of.

Before we get started, it’s helpful to familiarize yourself with common terms used to understand the viatical settlement industry.

• Viator. A viator is the individual diagnosed with a terminal illness and selling their life insurance policy. If you are the individual in a viatical settlement transaction, you are the viator.
• Life Settlement company. This is not to be confused with “life insurance company” or “life insurance agent.” Life settlement companies purchase life insurance policies, while life insurance companies and their agents are the ones that provide them.
• Death benefit. This is the amount a life insurance policy pays to the beneficiaries upon the passing of the insured. This is also referred to as the face value of the policy.
• Cash surrender value. This is not the same as the death benefit. This is a small amount of money you receive from your insurer  (the life insurance company, not the life settlement company), in exchange for surrendering the rights to your death benefit.

What is a viatical settlement?

A viatical settlement transaction is a way for individuals facing shortened life expectancy, as a result of a chronic or terminal illness, to receive cash by selling their life insurance policy to a third party.

When this happens, the buyer (also referred to as a viatical settlement company), agrees to pay the remaining monthly premium payments in exchange for receiving the policy’s death benefit upon the insured individual’s passing. When a deal is made, funds are held in escrow by a neutral party while the life policy is transferred to the viatical settlement company.

When the transaction is complete, the life insurance policyholder will…

• Receive a lump sum payout
• No longer be insured
• Will not have to pay any additional premium payments

Like all life settlements, the amount the policy seller receives is less than the face value of the policy but higher than the cash surrender value. Viatical settlements on average pay out a higher amount than other types of life settlements.

Why get a viatical settlement?

The primary reason for getting a viatical settlement is to access an immediate lump cash payment.

Oftentimes chronically or terminally ill people face very large medical expenses which exceed the amounts covered by their health insurance. Last year alone, it was reported that 63% of cancer patients and loved ones had financial struggles following their diagnosis.

By both providing a substantial cash payout, and eliminating the expense of additional premium payments, viatical settlements can greatly help to mitigate financial struggles. That’s particularly true if they can provide life-extending care for the policyholder.

Similarly, if a life insurance policyholder is unable to pay their monthly premiums — and therefore risks lapsing their policy — a viatical settlement allows them to receive value for their policy rather than lose it for nothing.  Lapsing policies due to nonpayment is a situation that unfortunately happens to roughly 5% of all life insurance policies every year.

When deciding whether or not to get a viatical settlement, it’s essential the policy owner considers the financial implications to their beneficiaries of eliminating their insurance policy. There is no right or wrong answer here, and each case is individual, however it’s important to keep in mind you cannot receive both a viatical settlement and the death benefit of your policy (an accelerated death benefit does allow for this hybrid approach).

Viatical settlements vs. life settlements

You’ll often hear the terms life settlement and viatical settlement linked together. A viatical settlement is technically a type of life settlement, though the nature and significance of the policyholder’s medical condition mean these two types of transactions are subject to different state laws, taxation, and regulation.

As a general statement, a policyholder will receive more in a viatical settlement than a standard life settlement, but there will be more regulation and paperwork involved. Many of the same companies operate viatical settlements as well as general life settlements, and the process is largely the same.

However, because of certain benefits afforded policyholders selling viatical settlements— including tax exemptions and minimum payouts, you’ll want to make sure any information you’re gathering is specific to viatical settlements.

The two types of viatical settlements

When applying for a viatical settlement, there are two ways in which you legally qualify: being terminally ill, and being chronically ill. We outline the difference below:

• Terminally ill. Terminally ill is defined as having a life expectancy of fewer than 24 months. Examples of terminal illness include stage 4 cancer, advanced heart disease, motor neuron disease, and AIDS.
• Chronically ill. Chronically ill refers to someone with an impairment that prevents them from performing at least two or more activities of daily living as the result of a loss of functional capacity. This condition must be ongoing (a period of at least 90 days), and must be certified by a licensed health care practitioner within the last 12 months.

Examples of activities of daily living include:

• Eating
• Bathing
• Getting out of bed
• Going to the bathroom
• Getting dressed
• Walking independently without assistance

Common examples of chronic illness include:

• Advanced Alzheimer’s
• Advanced Parkinson’s
• Dementia
• COPD
• Cancer

Keep in mind that one can have a chronic illness that is also considered terminal. In the context of a life settlement, this is unlikely to create a conflict, and one shouldn’t be worried about their condition qualifying under both.

There exist some chronic conditions such as arthritis, asthma, or diabetes that may be considered “chronic” or ongoing, but not severe enough to be considered for viatical settlements. Your licensed healthcare practitioner will be the best person to determine whether your chronic condition is debilitating enough to limit 2 activities of daily living.

How much will I receive in my viatical settlement?

The exact amount one receives in a viatical settlement will always differ, but is typically worth more than the policy’s cash surrender value, but less than the policy’s death benefit. Health status is a major factor. The lower the life expectancy of the insured and the greater their death benefit, the higher their payout is likely to be.

To give consumers assured reasonable value, the National Association of Insurance Commissioners instituted minimum payments for viaticals. These minimums ensure individuals with less than 25 months life expectancy can expect a minimum of somewhere between 60-80% of their policy’s face value, and when the policy holder’s life expectancy is less than 6 months, minimum payouts must exceed 80% of the face value.

Additionally, the price of the policy’s insurance premiums and the type of life insurance they have all affect the value of their life settlement. This is particularly true when evaluating between term life insurance policies, which have no cash value component, and whole life insurance policies, which do.

The generally accepted minimum for a life insurance policy that’s qualified for viatical is $50,000, with the most common being a $1 million policy. Even if a policyholder was able to only get 50% of the face value through a viatical, that is $500,000 that might have been lost through a policy lapse.

The best way to estimate the value of your viatical settlement is to use a life settlement calculator. Outside of that, you will need to complete the application process and receive an offer from a life settlement company. Keep in mind, these offers are both negotiable and differ from company to company, so there is no “one size fits all” for evaluating a policy’s value.

What is an accelerated death benefit? Should I get one?

An ‘accelerated death benefit’ is a type of provision (also called a “rider”) included in some life insurance policies, which allows the policyholder to receive cash advances against the value of their death benefit — while still keeping the policy active.

Often referred to as a “living benefit rider” or “terminal illness benefit,” an accelerated death benefit is typically activated when the policyholder is diagnosed as terminally ill, typically with an estimated life expectancy of fewer than 24 months.

Many new life policies will have this benefit or rider built into the policy at no extra cost, however, there is a fee of up to $250 (plus any outstanding premiums) in order to activate this benefit. Oftentimes, life insurance companies will still offer accelerated death benefits even if it wasn’t included by underwriters in the life policy originally.

The main reason for exercising an accelerated death benefit is to tap into the value of your life policy while still keeping the policy intact for your beneficiaries. However, it should be noted that the amount withdrawn will be deducted from the total death benefit, so ultimately the amount received is the same.

Accelerated death benefits have limits. You are allowed up to 75% of a policy’s value or $250,000, whichever is less.

The downside is that the policyholder still needs to make premium payments during this time. However, future premiums are often adjusted to reflect the remaining policy value.

Viatical settlement providers

In general, all providers of life settlements will also provide viatical settlements. However, some life settlement providers only deal with viatical settlements. This generally means a viator will not need to be concerned about a life settlement company they’ve found not accepting viatical settlements.

In addition to looking at lists of life settlement companies, a surefire way to find life settlement providers is to locate your state’s department of insurance website and conduct a search for viatical settlement providers. You can see an example of this kind of list with Iowa’s state department of insurance.

What is a viatical settlement broker?

A viatical settlement broker is a licensed insurance professional who negotiates with multiple life settlement providers on behalf of their client, the viator. This process involves helping retrieve medical records, fielding multiple offers, and ensuring you get the maximum possible value for your policy.

Viatical settlement brokers have a fiduciary responsibility to their clients, meaning they are legally obligated to keep their clients best financial interest in mind. This is different from many life settlement providers, who are acting on behalf of financial institutions.

The downside to viatical settlement brokers is they often charge hefty fees, sometimes as high as 40% of the total payout. These fees often seem smaller, as they are listed as a percentage of the benefit, of which policyholders only receive a fraction. The laws defining what individuals or companies may act as life settlement brokers differ state-to-state, so you’ll want to check with your state department of insurance before selecting a broker.

History and regulation of viatical settlements 

While the viatical settlement industry has really taken shape in the last 30 years, the legal precedent for the sale of a life insurance policy goes back to the early 20th century, where a Supreme Court case, Dr. Grigsby v. Russell, established that life insurance was an asset, including all attendant rights of valuation and sale. 

This precedent went largely untested until the 1980s when the U.S. AIDS epidemic saw thousands of men with diminished life expectancy looking to find a means of paying for their medical expenses. It was in these times that the first viatical settlement contracts first came to be — oftentimes between individual investors and policyholders. 

Since then, the viatical industry has matured into a well-regulated market, processing over $3.8 billion in policies across 2,722 settlements in 2018. During this process, extensive regulation was rolled out from the onset, making life settlements one of the best-regulated insurance products in the United States. 

However, like life insurance regulation, the laws governing life and viatical settlements vary from state to state. Currently, Alabama, Missouri, South Carolina, South Dakota, Wyoming, and Washington, D.C. do not regulate any life settlements, with Michigan and New Mexico regulating viatical settlements only. 

These regulations can be very beneficial, such as requiring states to disclose all offers, counteroffers, and alternatives to settlements, as well as risks related to taxation and public assistance. Many states also require life settlement companies to adhere to federal and state privacy laws preventing fraud. 

Life and viatical settlement regulations in most states follow models from the NAIC or the NCOIL. However, while designed to help consumers, regulations can also inhibit the sale of life policies. 

For instance, mandatory waiting periods or settlement minimums can make those interested in selling their policies ineligible or unfeasible to settlement companies. This is particularly true of viatical settlements, which are more heavily regulated than general life settlements.

Tax implications and Medicaid

One of the most common questions regarding viatical settlements is, “Are they subject to federal income tax?”

For the most part, viatical settlements are viewed as advances on the death benefits of life policies and are therefore considered income tax-free. This is slightly different from taxation on life settlements generally, which count payouts exceeding the total premiums paid by the policyholder as income.

To qualify for a tax-free life settlement transaction, an individual must meet the requirements for viatical settlements including a life expectancy of less than two years and must sell their policy to a state-licensed life settlement provider.

There are a few exceptions to this:

• In the case of chronic illness viatical settlement, funds not used to cover long-term care expenses are taxed.
• If you have an estate worth more than $11 million, your life settlement proceeds will be counted towards your estate tax.

Medicaid eligibility

Viatical settlements will provide you with a large cash payment which is likely to change your financial status, often making you ineligible for government programs such as Medicaid.

While this can seem stressful to individuals in immediate need of healthcare, the truth is the surrender values of life insurance policies are already considered toward the $2,000 asset limit for Medicaid. In this case, you either need to let your policy lapse or accept the cash surrender value and spend it down, both of which net you less money than a viatical settlement.

In the case of a viatical settlement, you are able to use the funds you receive towards any type of case, not just that provided under Medicare, and if your funds become exhausted, you may one again become eligible for public assistance.

The other option is to use a viatical settlement broker, who will know the entire secondary market, and will be able to source offers from the various companies.

Get a free viatical settlement estimate

If you are a chronically or terminally ill patient looking for immediate cash, a viatical settlement may be a great option for you. However, before selling your life policy you’ll want to first consider the effect it will have on your family members and other beneficiaries, eligibility for any public assistance programs, and your overall financial situation. It’s always a good idea to speak with a financial advisor before you make any final decisions.

Want to see how much you could earn from a viatical settlement? Get an instant valuation with our calculator below.