What Is the Primary Feature of a Viatical Settlement?

A viatical settlement offers a financial pathway for individuals facing a terminal or chronic illness, providing access to funds from their life insurance policy while they are still living. This arrangement serves as a specialized financial tool, allowing policyholders to convert an illiquid asset into immediate cash.

Understanding Viatical Settlements

A viatical settlement involves the sale of a life insurance policy by a policyholder who is terminally or chronically ill to a third-party buyer. In this transaction, the policyholder receives a lump sum cash payment, which is typically less than the policy’s full death benefit but more than its cash surrender value. The buyer, known as a viatical settlement provider, then assumes responsibility for all future premium payments and becomes the new beneficiary of the policy, receiving the full death benefit upon the original insured’s passing.

The primary feature that defines a viatical settlement is the policyholder’s health status, specifically a diagnosis of terminal or chronic illness. This condition typically means a life expectancy of 24 months or less, as certified by medical professionals. This strict health requirement distinguishes a viatical settlement from a life settlement, where the insured generally has a longer life expectancy and does not need a terminal diagnosis.

The motivation for policyholders to pursue a viatical settlement often stems from an immediate need for funds to cover escalating medical costs, improve their quality of life, or manage other financial obligations. Accessing these funds allows individuals to address pressing expenses without liquidating other assets, such as a home.

The cash proceeds from a viatical settlement are generally tax-free for the seller under federal law, as they are considered an advance of the death benefit. The amount offered for a policy can vary widely, but commonly ranges from 50% to 85% of the policy’s face value. Factors influencing the payout include the insured’s precise life expectancy, the policy’s face value, and the amount of future premiums the buyer will need to pay.

Who Qualifies for a Viatical Settlement

Eligibility for a viatical settlement centers primarily on the policyholder’s health condition, requiring a diagnosis of a terminal illness certified by medical professionals. Some states and providers may also include chronically ill individuals who are unable to perform a certain number of daily living activities, even if their life expectancy is longer.

The type of life insurance policy also plays a role in qualification. Permanent life insurance policies, such as whole life or universal life, are generally preferred for viatical settlements due to their guaranteed death benefit and potential cash value accumulation. While term life policies are less commonly eligible, they may be considered if they are convertible to a permanent policy or have a substantial remaining term. Additionally, policies typically need to have been in force for a certain period, often referred to as a seasoning period.

Viatical settlement companies may also set a minimum death benefit amount for the policy, with a common threshold being around $100,000, though this can vary. A higher death benefit tends to result in a more attractive offer from buyers. The policyholder must be the legal owner of the life insurance policy they intend to sell. If the policy is held in a trust or owned by another entity, the owner must actively participate in the sale process and consent to the transfer of ownership.

How Viatical Settlements Work

The process of obtaining a viatical settlement begins with the policyholder or their representative contacting a viatical settlement provider or a broker. A provider is a licensed company that directly purchases policies, while a broker acts as an intermediary, representing the policyholder to find the best offer from multiple providers.

Upon initial contact, the policyholder submits an application along with necessary documentation. This typically includes a release for medical records to allow the provider to verify the terminal illness diagnosis and assess life expectancy. Information about the life insurance policy, such as its type, face value, and premium schedule, is also required for evaluation.

Following the medical assessment, the provider generates an offer for the policy. This offer is a lump sum cash payment, calculated as a percentage of the policy’s death benefit, factoring in the life expectancy, future premium costs, and market conditions. The policyholder then evaluates the offer and can choose to accept it or attempt to negotiate for a better amount. If an agreement is reached, the ownership of the life insurance policy and the beneficiary designation are legally transferred to the viatical settlement provider.

The final step involves the disbursement of funds to the policyholder, typically handled through an escrow account. The escrow agent holds the funds until all necessary paperwork, including the change of ownership and beneficiary, is finalized with the insurance company. Once confirmed, the cash is released to the policyholder, providing them with immediate financial resources.

Key Participants in a Viatical Settlement

The central figure is the policyholder, also known as the viator, who is the individual selling their life insurance policy due to a terminal or chronic illness. This person receives the cash payment and relinquishes all future rights to the policy, including the death benefit.

The viatical settlement provider is the licensed entity that purchases the life insurance policy from the policyholder. These companies provide the lump sum payment and assume responsibility for all future premium payments on the acquired policy. They ultimately receive the full death benefit when the insured passes away.

A viatical settlement broker acts as an independent agent who represents the policyholder. Their role is to assist the policyholder in navigating the market, soliciting offers from various viatical settlement providers, and aiming to secure the most favorable terms for the sale of the policy. While optional, using a broker can help ensure competitive offers.

Medical professionals, primarily physicians, play a fundamental role by providing the necessary certification of the policyholder’s terminal or chronic illness and their estimated life expectancy. Their assessment directly impacts the feasibility and valuation of the settlement.

An escrow agent or company is also a participant, facilitating the secure transfer of funds and policy ownership. The escrow agent holds the cash payment in a neutral account until all legal and administrative requirements for the transfer of the policy are met. This ensures that both the policyholder receives their funds and the provider gains legal ownership of the policy in a transparent manner.