Viatic settlement refers to the sale by the policy owner of a life insurance plan before it matures. This sale gives the policy owner immediate cash settlement. Viitical settlements are generally for insured people with a shorter life expectancy than five years. Life settlements (also known as senior settlements) are similar to viaticals. They involve the sale of a life insurance policy to an owner with a shorter life expectancy but whose life expectancy exceeds 5 years.
This is an effective way to pay the extremely high medical costs of severely ill patients in countries that do not have state-subsidized healthcare. This is often the only way to obtain the funds needed to pay for care when someone is suffering from a fatal condition.
Because it offers a unique financial service, the Life Insurance Settlement Industry is a viable industry. Viitical settlements allow policyholders the ability to use their life insurance policy in a liquid financial asset. It’s a valuable service for anyone in need of financial aid.
A viatical settlement is a payment that takes into account the future value of your life insurance proceeds. The computation of a present-value amount is influenced by four factors. These include the amount of the policy, the time it will take to collect the proceeds, as indicated in the insured’s expected life expectancy, the annual cost of maintaining premium payments and the discount rate.
Let’s say you have $500,000 in life insurance and you have an incurable type of cancer. This will help us explain the four factors. This type of cancer has a 3 year life expectancy. Your life insurance policy will be purchased by an investor or firm. Your life insurance policy will be sold via a settlement. You will not be allowed to sell your policy for $500,000 because there will be costs that the investor will have to pay.
The policy amount is the first factor. It is 500,000. This is the base point of computation. The second factor is the life expectancy. It is three years in this case. For the investor to receive his investment back, he will need to wait for 3 years. This 3 year period is merely a medical estimate. It could be shorter or longer. Investors assume this risk.
Third, the premium payment cost to keep the policy in effect is the third factor. If the policy expires, it is worthless immediately. The present value will take into account the monthly premium payments.
The investor will also get a rate of return. The investor could earn interest by simply placing his money in a savings or certificate of deposit account. Investors will seek a higher rate of return than alternatives that are less risky in order to assume the risk.
After all these factors have been calculated, the investor will calculate the present value of your future life insurance payment and offer to buy it from you. Each investor will have a different present value. While some investors may be willing to factor in a greater margin of life expectancy than others, others may prefer a higher rate or return. Shop around to get the best deal.
The industry was unregulated in the early days. While there were problems and abuses in the early days of viatical settlements, these have been eradicated since government regulators got involved. Despite some bad experiences by investors in the past, viatical settlements are still a useful tool for personal financial management for many people with serious illnesses. According to a 2002 study, the majority of hospice financial counselors who had experienced viatical settlements reported positive experiences.
