A really good way to understand viatical settlements is to see one in action. Let’s go back in time and see the first viatical settlement was completed over a century ago and see how they work.
A Brief History … The 1st Viatical Settlement
Mr. Burchard and Dr. Grigsby
Just after the turn of the century in 1900, Mr. Burchard was treated by Dr. A. H. Grigsby when he was in dire need of a surgical procedure and couldn’t afford to pay for it. Mr. Burchard reached an agreement with Dr. Grigsby to sell the doctor his life insurance policy for $100, with the agreement that Dr. Grigsby would continue to pay the premiums on it after buying it, and would be the beneficiary of the face amount when Mr. Burchard died.
The doctor agreed, and it can be said that the first viatical settlement transaction happened that day. When Mr. Burchard passed away his family contested the legality of the agreement, being most unhappy that they were no longer the policy’s beneficiaries and didn’t receive the death benefit.
However, in 1911 the U.S. Supreme Court decided it was a legal and binding agreement, and the first viatical settlement was born. This decision paved the way for all future viatical settlements as being legal agreements. Life insurance is indeed private property and can be assigned at the discretion of the owner.
In more modern times, the 1980s saw an increase in both the interest and activity of viatical settlements because of the proliferation of AIDS cases. Those who developed AIDS had short life expectancies, and the few treatments available were very expensive. Viatical settlements provided AIDS patients with the money for much needed care.
If there was to be a modern-day pandemic, it could be expected that the number of people wishing to sell their life insurance policies could increase dramatically as people’s need for cash would increase as an economic crisis materialized.
What Exactly Is a Viatical Settlement?
Simply put, a viatical settlement is the sale of a life insurance policy by the owner of the policy to a third party for cash considerations. The insured individual must be diagnosed as being terminally ill with a life expectancy of 24 months or less, or have a chronic illness (being unable to fulfill at least two activities of daily living (bathing, eating, toileting, dressing for at least 90 days). Chronically ill also describes someone requiring substantial supervision to protect themself from threats to their health and safety.
As viatical settlements have expanded in popularity, federal and state governments have taken action to make them safer for the consumer. The cornerstone of these efforts was the Health Insurance Portability and Accountability Act of 1996, or HIPAA.
HIPAA protected the rights of policyholders by allowing them to transfer their policies to third parties, and sell them as real property. Over time, as government recognition and protective measures have increased, viatical settlements have become safer investments. As a result, many more people have turned to them as a solution to provide needed funds.
Viatical settlements were negatively affected by the financial crisis of 2008. Due to the general collapse of financial resources following the crisis, fewer investors had funding available to buy viatical settlements. At the same time state governments began to enact new financial regulations, many of which made it more complex to buy and sell insurance policies. As a result, the viatical settlements industry did not grow as rapidly as it otherwise would have.
As the U.S. population ages, more and more people are developing diseases like diabetes and obesity. Many of these individuals need money to pay for their care, making viatical settlements a more attractive option. Nevertheless, most Americans who qualify for viatical settlements don’t take advantage of them because they are unaware of this option.
Viatical settlements are subject to strict regulation in most states. While individual rules and regulations vary from state to state, a common statute is that life insurance policies must be in force for two years to be eligible to be sold. Also, viatical settlement brokers must be licensed and are subject to continuing education requirements
Why would someone sell their life insurance policy after they’ve been paying premiums for so many years?
Many people who sell their life insurance policy have been paying premiums for quite some time, normally many years. Because of the accumulation of cash value inside of the policy (but not for term insurance), they consider their policy to be a financial asset.
However, when they’re diagnosed with a terminal illness, they become willing to sell their policy because they:
- Can’t pay the premiums any longer.
- Need the money to pay for medical expenses and long-term care costs
- Would like to have money made available to enjoy their preferred lifestyle in their remaining years or maintain their current quality of life.
- No longer have a need for life insurance. Perhaps the kids are grown and the mortgage is paid off. They aren’t worried about leaving money behind because they need the money now.
In those instances where someone has other assets, or comprehensive medical coverage, to cover expenses, a viatical settlement may not be the best route to take. By leaving the policy in force, and continuing to pay scheduled premiums, the policy beneficiaries will be able to receive the financial benefit which the policyowner intended them to have.
Viatical vs. Life Settlements
Confusion abounds when it comes to the difference between a viatical settlement and a life settlement.
The two are very similar in that a sum of money is paid to the policyowner for selling the life insurance policy to a third party. On average, viatical settlements have a higher purchase value than life settlements because a shorter life expectancy (24 months or less) will bring higher offers than a longer life expectancy.
The big difference between the two is this: With a viatical settlement, the insured must be terminally ill with a life expectancy of 24 months or less.
Viatical settlements and life settlements are taxed differently. A professional tax advisor should be consulted for clarification and interpretation as tax laws vary from state to state.
The Taxation of Viatical Settlements
Let’s take a look at some of the tax ramifications of viatical settlements.
The Internal Revenue Service’s tax code is the definitive source for the current tax status of viatical settlements. Before selling your life insurance policy, you should consult with a tax professional and verify what the tax status will be for you.
In most cases, the payment received from the sale of the policy is usually exempt from federal taxation, just as it is for a death benefit being paid to a beneficiary. This pertains to funds being received for the insured having a life expectancy of less than two years.
It can be different for individuals suffering from a chronic illness. If that person uses the funds to pay for long-term care, the proceeds from the sale are normally tax-free. If only a portion of the proceeds is used for long-term care, the balance can then be taxable.
Windsor Life Settlements, LLC, does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own professional advisors before engaging in any transaction.
Alternatives to Viatical Settlements
A reputable viatical settlement broker will evaluate your situation and tell you if this is the right road for you to take, or if you should also be considering other options.
One of these options is the Accelerated Death Benefit (ADB), which can be found as a rider in some insurance policies. The ADB rider allows someone who has been diagnosed with a serious illness to receive a percentage of the face amount of the policy while they’re still living.
ADB riders can pay out up to 100% of the face amount, and the face amount not paid to the policyowner still remains in force as a death benefit payable to the named beneficiaries.
Like viatical settlements, there are stringent requirements in place for those that wish to take advantage of the ADB. Typically, the insured must provide medical records proving they have a serious illness. ADB riders state that terminal illness will result in death between 6 months and 24 months, depending upon the carrier and type of policy.
The dollar amount of the benefit is paid up to the percentage and/or dollar amount outlined in the rider if the insured satisfies the terminal illness definition.
Reading the fine print of the policy is advised. Insurers will frequently charge administrative fees, which can be lump sums or a percentage of the payout. This needs to be factored in when comparing the ADB to a viatical settlement.
One other option to consider is borrowing a portion of the cash value which has built up over the years as a feature of the life insurance policy. Depending upon the premiums paid and the face amount of the policy, this can be a sizable sum that is available to the policy owner.
Policy loans are often available as no-interest or low-interest loans since the interest rate charged is offset by the interest rate credited. The loan amount will be deducted from the face amount of the policy upon death, but the face amount can still be a sizable amount for beneficiaries depending upon the percentage of cash value borrowed.
Consult with a licensed viatical settlement broker to review your policy and determine what the best alternative is for you.
Viatical Settlement Brokers
Now that you’ve researched viatical settlements and have a good understanding of what they are and what the potential benefits are for you, it’s a good time to contact a viatical settlement broker and talk with an expert.
When working with a viatical settlement broker, bear in mind that different states have different licensing requirements, and may in fact require you to work directly with a broker. This is for your protections as a consumer.
The last thing you want when you’re ill is to be working with someone that doesn’t have your best interests in mind. That’s why brokers have a “fiduciary” responsibility, meaning they have to put you first when it comes to any transaction you’re involved in. They can lose their license if they don’t.
It may make you feel more comfortable if you interview several brokers and gauge their capability, as well as their commitment to helping you. Some things to look for in a broker are:
- Transparency concerning what their fees are and the services they offer
- Security and privacy with your confidential information
- Has insurance protecting you if they make a mistake
- Makes sure all regulations are followed by all parties involved in your transaction
- Shops your policy with multiple buyers to get you the best offer in terms of price and following of procedure
- Offers a life settlement calculator for you to get an idea of what your policy may be worth to you.*
Take your time selecting a viatical settlement broker. It’s a very important decision for you. Reputable brokers will take the time to answer all of your questions and will provide references for you to talk with about their experience.
*Windsor’s Life Settlement Calculator is intended to assist in the evaluation and qualification of life insurance policies. It is an estimate and is not intended to represent a bid or an actual offer to purchase a life insurance policy. The results are not binding and do not guarantee that any life settlement provider will offer to purchase a policy. By using the Life Settlement Calculator, you authorize Windsor Life Settlements to contact you, including by telephone. No representation or warranty, expressed or implied, is made as to the accuracy, reliability or completeness of the results.
The Viatical Settlement Calculator
If you’re interested in viatical settlements, you quite likely have a life insurance policy that you are thinking of selling. Having paid premiums for a number of years can sometimes make people reluctant to part with it. But, it’s important to remember that a life insurance policy is simply a financial asset that you purchased to meet your financial needs. If you have been diagnosed with a terminal illness, you may have an immediate need to benefit from your policy.
But what dollar amount is your life insurance policy worth? As mentioned above, there are a number of variables involved that will determine that. But in addition to those variables, different parties interested in purchasing your policy will offer different amounts for your policy, much as you’d receive multiple offers when selling a home.
Before talking with a viatical settlement broker, you may want to use Windsor’s viatical settlement calculator. Here you’ll enter basic information about yourself and your policy, then the calculator will give you an estimate on the value of your policy. You’ll then want to talk with a Windsor viatical settlement broker and have a conversation about your specific situation and how they can help.
Questions and Answers
Q: Can someone who isn’t terminally ill still sell their life insurance policy for profit?
A: Absolutely. As mentioned above, a life settlement is a type of life insurance policy sale which is very similar to a viatical settlement, with the major difference being that the insured can have a life expectancy longer than two years.
Q: Are viatical settlements protected from creditors?
A: While life insurance death benefits are protected from creditors, payments for viatical settlements are generally not protected. Your tax advisor should be consulted regarding matters concerning taxation.
Q: Who pays the premiums after the policy is sold?
A: After the policy is sold, the premiums are paid by the entity that purchased the policy, relieving the original policy owner of this responsibility.
Q: Are viatical settlements scams?
A: Viatical settlements are not scams. They have been criticized by people that don’t understand them, but they are a completely legal way for ill people to get funds when they need it most for medical services.
Q: Are viatical settlements regulated?
A: Viatical settlement laws and regulations exist in 45 states, plus Puerto Rico, and cover 90% of insured Americans. Each state’s department of insurance is the regulatory body concerning viatical settlements.