Viatical settlements offer a way to get money out of your life insurance while you’re still alive.
Life insurance policies are often designed to assist your loved ones in managing their financial obligations after you pass away. Viitical settlements are a way to make your policy useful even if you have to give up the death benefit. They allow you to receive cash upfront in exchange of future life insurance payouts.
The loss of your death benefit can have an enormous impact on your loved ones. Viitical settlements should not be taken lightly. With many policies now offering life insurance riders to help support you while you’re still alive, you may no longer need to sell your policy.
What is a Viotical Settlement?
Viitical settlements are when you have less time to live because of illness or injury. Usually, this is less than two years. You can sell any type of life insurance — term, whole, universal, etc. You will need to find a buyer on the market for this type of policy.
Sales of a life insurance policy are generally called life settlements, and when they take place near the end of life, they’re called viatical settlements.
Although viatical settlements differ from policies that allow you tap part of your death benefits while you are still alive, they can often be used in the same circumstances. This is most commonly the accelerated death benefit riders, which allow you to withdraw a portion from your death benefit if diagnosed with a terminal or serious illness.
Some people may decide to sell their future benefits because they are unable to get an accelerated death benefit or need more money than the benefit.
What is the average price of a viatical settlement?
A viatical settlement will pay you a payment that is equal to the death benefit of your policy and any cash value accrued.
For instance, consider a hypothetical permanent life insurance policy that will pay out $1 million when you die. Over the years, this policy might have built a cash value of $150,000, allowing you to get cash from your life insurance by borrowing or withdrawing some of this value.
You might be eligible for a viatical settlement in the amount of $500,000 if the $150,000 is not enough.
The exact amount paid will depend on the value of all involved and the seller’s life expectancy. The rule of thumb is that the shorter you live, the lower your payout will be. Taking a viatical settlement also means the life insurance beneficiaries you originally chose will get nothing from your policy when you die.
This payment can be compared to an accelerated funeral benefit rider which may allow for monthly payments over a 2-year period. Your $1,000,000 policy could allow for $250,000 total payments. When you die, your beneficiaries will still receive $750,000, which is $1 million less your $250,000 accelerated payments.
The amount you receive will depend on the value of your policy, your health, what type of policy you have, and where you live. In general, accelerated death benefit riders offer payments of between 25% and 75% depending on the policy’s value. Viatical settlements may be up to 80% of your policy’s total value.
Basics of viatical settlement
Participating in a viatical Settlement requires that both you and your buyer (the “viatical settle provider”, which is often a company) meet certain requirements. These include rules regarding your health. Most settlements, like an accelerated death benefit or chronic illness, require that you are either terminally ill or severely ill.
You will need to sell your payment to a state-based company to get the best tax treatment. Viatical settlement taxation is complex. Anyone considering settling should consult an independent financial advisor.
Your policy must be at least two to five years old before you can sell. Many states that regulate viatical settlements require that the policy be held for at least two to five year before you can sell it. This is to ensure that you don’t purchase a policy to immediately sell after you have received a terminal diagnosis.
Alternatives to Vietical Settlements
An accelerated death benefit can replace the need to settle viatical claims in many cases. It is easy to claim an accelerated benefit. Most insurance policies have a rider, and the benefits are usually not as large as a settlement.
If you own life insurance with cash value, you can also consider borrowing against your policy. You can borrow against your policy to keep your coverage in force, provide cash immediately and leave something for your beneficiaries.