What Is a Viatical Settlement and How Does It Work?

A viatical settlement offers individuals facing a terminal or chronic illness a way to access a portion of their life insurance policy’s death benefit while they are still living. This financial transaction involves the sale of an existing life insurance policy to a third party. The policyholder receives a lump-sum cash payment, which is typically more than the policy’s cash surrender value but less than its full death benefit. This arrangement provides immediate funds that can be used to cover medical expenses, living costs, or other financial needs during a challenging time.

Key Participants and Their Functions

Several distinct parties are involved in a viatical settlement, each with specific roles and responsibilities that facilitate the transaction. The primary participants include the insured individual, the viatical settlement provider, and the investor.

The insured individual is the original policyholder whose life insurance policy is being sold. This person typically has a terminal or chronic illness, making them eligible for this type of settlement. Their function is to initiate the process by seeking an offer for their policy, providing necessary medical and policy documentation, and ultimately transferring ownership in exchange for a cash payout.

The viatical settlement provider is a company that purchases the life insurance policy from the insured. This entity acts as an intermediary, often connecting policyholders with investors or directly funding the purchase themselves. Their function involves evaluating the policy and the insured’s health status, making a cash offer, and managing the legal and financial aspects of the transaction. Once the sale is complete, the provider becomes the new owner of the policy, assuming responsibility for all future premium payments.

The investor is the entity or individual who provides the capital to purchase the policy. Investors fund the viatical settlement provider, either directly or indirectly, and ultimately become the beneficiaries of the policy’s death benefit. Their role is to provide the financial backing for the transaction, anticipating a return on their investment when the insured individual passes away. These investors assume the risk associated with the insured’s actual lifespan, as a longer life expectancy reduces their potential return.

Steps in a Viatical Settlement

The process of completing a viatical settlement typically follows a structured series of steps, beginning with the policyholder’s initial interest and concluding with the transfer of funds and policy ownership.

The process often begins when the policyholder contacts a licensed viatical settlement provider or broker to inquire about selling their life insurance policy. During this initial phase, the policyholder provides basic information about their policy, such as the face value, type of policy, and the issuing insurance company. They also disclose their current health status and medical diagnoses.

Following the initial inquiry, the provider requests access to the policyholder’s medical records to assess their health condition and determine their life expectancy. This medical underwriting is a thorough review conducted by medical professionals to provide an estimated lifespan, which is a primary factor in the valuation process. The policyholder also submits detailed policy information, including premium schedules and any outstanding loans against the policy.

Once the medical and policy information is thoroughly reviewed, the viatical settlement provider formulates a cash offer for the policy. The policyholder then evaluates this offer and decides whether to accept it.

If the policyholder accepts the offer, legal documents are prepared to facilitate the transfer of policy ownership and beneficiary rights to the viatical settlement provider or the underlying investor. The policyholder typically signs an absolute assignment form, which transfers all rights, title, and interest in the policy.

Upon the successful transfer of ownership, the agreed-upon lump sum payment is disbursed to the policyholder. The new policy owner then assumes responsibility for all future premium payments, ensuring the policy remains in force until the death benefit is paid.

Determining the Settlement Amount

The cash payout a policyholder receives in a viatical settlement is determined by several objective financial and medical factors.

A primary factor is the insured’s life expectancy, which is assessed through a comprehensive review of their medical records by independent medical professionals. A shorter life expectancy generally results in a higher percentage of the death benefit being offered as a settlement, as the investor anticipates a quicker return on their investment. This assessment considers the specific terminal or chronic illness, its progression, and any other relevant health conditions.

The policy’s face value, also known as the death benefit, is another significant determinant. A higher face value generally allows for a larger absolute settlement amount.

The amount of future premiums that need to be paid to keep the policy in force directly impacts the settlement value. The viatical settlement provider or investor assumes responsibility for these ongoing payments, and the total cost of these premiums over the insured’s estimated remaining life reduces the amount they are willing to pay upfront. Policies with fewer remaining premium payments or those that are fully paid up may command a higher settlement.

Any outstanding loans against the life insurance policy or accumulated cash surrender value also influence the final offer. Policy loans must typically be repaid or accounted for in the settlement amount, reducing the net cash received by the policyholder. Providers also consider administrative costs, broker fees, and their desired rate of return when calculating the final offer.

Regulatory Framework

Viatical settlements operate within a regulatory framework. Oversight is primarily conducted at the state level, with insurance departments playing a central role.

Most states have specific laws and regulations governing viatical settlements, often administered by their respective state departments of insurance. These regulations typically require viatical settlement providers and brokers to be licensed within the state where the policyholder resides.

State regulations often mandate disclosures to policyholders, detailing the terms of the settlement, potential tax implications, and alternatives to a viatical settlement, such as accelerated death benefits offered by some insurers. They may also include provisions for a rescission period, allowing policyholders a limited time to change their mind after signing the settlement agreement.

While state insurance departments regulate the transactions themselves and the entities involved, there can be federal oversight if viatical settlements are structured as securities. The Securities and Exchange Commission (SEC) may assert jurisdiction if these policies are purchased by investors as part of an investment contract, requiring compliance with federal securities laws. However, the direct sale of a policy by an individual to a provider is typically governed by state insurance law.

The regulatory environment seeks to balance the policyholder’s need for liquidity with the investor’s financial interests. These regulations help prevent fraudulent practices and ensure that the market for viatical settlements operates fairly and transparently. Compliance with these rules is essential for all parties.