What is a viatical settlement?
A viatical settlement is a financial arrangement in which a policyholder with a terminal illness sells their life insurance policy to a third party, typically a viatical settlement company, for a cash payout. The policyholder receives a lump sum payment that is typically less than the face value of the policy, but more than the policy’s cash surrender value. The third party becomes the beneficiary of the policy and will receive the death benefit when the policyholder passes away.
Who is eligible for a viatical settlement?
To be eligible for a viatical settlement, a policyholder must have a terminal illness, as defined by their insurance company. This typically means the policyholder has a life expectancy of two years or less. The policyholder must also own a life insurance policy with a death benefit of at least $50,000.
What are the advantages of a viatical settlement?
There are several advantages to a viatical settlement:
Financial security: A viatical settlement can provide financial security for a policyholder facing a terminal illness. The lump sum payment can be used to cover medical expenses, pay off debts, or provide for loved ones.
Control: A viatical settlement allows a policyholder to have control over their life insurance policy and how the death benefit will be used.
Peace of mind: A viatical settlement can provide peace of mind for a policyholder and their loved ones, as it allows them to plan for the future and ensure their financial needs are met.
What are the drawbacks of a viatical settlement?
There are a few drawbacks to a viatical settlement:
Reduced death benefit: The policyholder will receive a lump sum payment that is typically less than the face value of the policy, so the death benefit will be reduced.
Loss of coverage: Once the policy is sold, the policyholder will no longer have coverage under the policy.
Complex process: The process of obtaining a viatical settlement can be complex, as it involves negotiations with a third party and may require the policyholder to undergo medical examinations.
How is the lump sum payment calculated?
The lump sum payment a policyholder receives in a viatical settlement is typically based on their life expectancy and the face value of their policy. The viatical settlement company will typically hire a life expectancy expert to determine the policyholder’s life expectancy, which is then used to calculate the lump sum payment. The policyholder will receive a percentage of the face value of the policy based on their life expectancy.
What fees are associated with a viatical settlement?
There are several fees associated with a viatical settlement, including:
Life expectancy assessment fee: The viatical settlement company will typically hire a life expectancy expert to assess the policyholder’s life expectancy, which will be used to calculate the lump sum payment. The policyholder will be responsible for paying this fee.
Policy application fee: The viatical settlement company may charge a fee to process the policy application.
Brokerage fee: A brokerage fee may be charged by a broker or agent who helps facilitate the viatical settlement.
What are the tax implications of a viatical settlement?
The tax implications of a viatical settlement depend on the circumstances of the policyholder. In general, the lump sum payment received in a viatical settlement is taxable as income. However, if the policyholder used the proceeds of the policy to pay for qualified long-term care expenses, the payment may be tax-free. It is important for a policyholder to consult with a tax advisor to determine the tax implications of a viatical settlement.
It is important for a policyholder to carefully consider the pros and cons of a viatical settlement and to seek the advice of a financial advisor before making a decision.