A Policyholder's Guide To Viatical Settlements

Is A Viatical Settlement Right For You?

Viatical settlements are for people of any age who are living with a chronic or terminal illness like cancer.  Viatical settlements are, unfortunately, exclusively for policyholders who have 24 months or less to live.  In this case, offers to purchase the policy are typically much higher, reaching as high as 80% of the face amount of the policy.

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Viatical Settlements Date As Far Back as 1911

A great way to understand viatical settlements is to see one in action. The first viatical settlement was completed over a century ago, setting a precedent for what would become a multi-billion dollar market.

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, provided Dr. Grigsby would continue to pay the premiums after buying it. This agreement would make Dr. Grigsby the new beneficiary of the policy when Mr. Burchard died.

The agreement was made official, and thus, the first viatical settlement was in the record books.

After Mr. Burchard passed away, his family, the policy’s previous beneficiaries, would contest the legality of the agreement. However, in 1911 the U.S. Supreme Court decided it was a legal and binding agreement. So, the first viatical settlement was born. The court’s decision paved the way for all future viatical settlements being legal agreements.

What Exactly Is a Viatical Settlement?

Simply put, a viatical settlement is the sale of a life insurance policy to a third party for cash.

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 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 policies. 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 could have.

As the U.S. population ages, more and more people are developing diseases like diabetes and cancer. 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 because they are simply unaware of this option.

Due to increased popularity, viatical settlements are now 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 for sale to a third party. 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?

Policyholders 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), a policy should be considered a financial asset, much like a house.

However, once diagnosed with a terminal illness, policyholders become willing to sell the policy because:

  • Premiums are unaffordable
  • Money is needed to pay for medical expenses and long-term care costs
  • Lifestyle choices for remaining years requires funding.
  • Policy is simply no longer needed. Perhaps the kids are grown and the mortgage is paid. Priorities change from leaving money behind to wanting access to funds in the near term.

In some cases where a policyholder has comprehensive medical coverage to cover expenses, a viatical settlement may not actually be the best option. By leaving the policy in force, and continuing to pay scheduled premiums, the policy beneficiaries will be able to receive the financial benefit that the policy owner originally intended.

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 policy owner 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 cases with a longer life expectancy.

The major difference between the two is that 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 also 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

The Internal Revenue Service’s tax code is the definitive source for the current tax status of viatical settlements. Before selling a life insurance policy, policyholders are encouraged to consult with a tax professional to confirm the current federal and state tax status.

In most cases, the payment received from the sale of the policy is 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 also normally tax-free. If only a portion of the proceeds is used for long-term care, the balance can be taxable.

Additionally, residents of New York may be exempt from Viatical Settlement tax.

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 a policy and provide all available options, even if that option does not include a settlement.

One of these non-settlement options is the Accelerated Death Benefit (ADB), which can be found as a rider in some insurance policies. The ADB rider allows a policyholder diagnosed with a serious illness to receive a higher percentage of the face amount of the policy while still living.

ADB riders can yield up to 100% of the face amount. The remaining face amount not paid to the policyowner stays in force as a death benefit payable to the named beneficiaries.

Like viatical settlements, there are stringent requirements in place for policyholders that wish to take advantage of the ADB. Typically, the insured must provide medical records proving 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.

Another option to consider is borrowing a portion of the cash value that 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

Policyholders continue to research viatical settlements as consumer awareness increases. As policyholders gain understanding of the potential benefis, it becomes clearer that contacting an expert viatical settlement broker is a great way to make the best financial decision.

When considering a viatical settlement broker, policyholders should bear in mind that different states have different licensing requirements. Some states, in an effort to promote consumer protection, actually require policyholders to work with a broker.

Policyholders with serious health impariments are encouraged to work with someone that has their best interests in mind. Viatical settlement brokers have a “fiduciary” responsibility, meaning they are required to prioritize the needs of the policyholder. Otherwise, brokers risk losing their license.

Policyholders tend to feel more comfortable interviewing several brokers early in the process in order to gauge compatibility, transparency, and trustworthiness. Things to look for in a broker are:

  • Transparency concerning fees and scope of the services offered
  • Security and trustwortiness concerning a policyholder’s confidential information
  • Proper insurance in place to protect consumers.
  • In compliance with the local regulations involved in the transaction
  • Shops your policy with multiple buyers to get the best offer
  • Offers a viatical settlement calculator to help consumers get an immediate estimate for a specific policy.

Policyholders are encouraged to spend considerable when time selecting a viatical settlement broker. It’s a very important decision. Reputable brokers will take the time to answer all questions and will provide references for you to talk with about their experience.

Viatical Settlement Calculators are intended to assist in the evaluation and qualification of life insurance policies. They provide general estimates and are 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 a Viatical Settlement Calculator, policyholders usually authorize viatical settlement brokers to make contact, 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

Policyholders interested in viatical settlements can get an immediate estimate by using free viatical settlement calculators. Having paid premiums for a number of years can sometimes cause a hesitation to sell. However, it’s important to remember that a life insurance policy is a financial asset purchased to help meet 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 a life insurance policy worth? As mentioned above, there are a number of variables involved that will help calculate the potential value of a settlement.

But in addition to those variables, different parties interested in purchasing a policy will offer different amounts for a policy, similar to receiving multiple offers when selling a home.

Before talking with a viatical settlement broker, policyholders may want to use a viatical settlement calculator. After entering basic information about the insured and the policy, the calculator will provide an immediate estimate. Policyholders, now armed with an estimate, are better-prepared to speak with a viatical settlement broker to determine if a proper broker 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 etc.

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.

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