In recent years, viatical settlements have become a useful financial tool for individuals facing terminal illnesses who need immediate cash to cover medical bills, end-of-life expenses, or simply improve their quality of life during their remaining time. This guide delves into the details of viatical settlements, how they work, their benefits and risks, and key considerations for both sellers and investors.

The Basics of Viatical Settlements

A viatical settlement involves three main parties:

• The Policyholder (Seller): This is an individual diagnosed with a terminal illness, typically with a life expectancy of two years or less. The policyholder owns a life insurance policy but needs immediate financial assistance and opts to sell the policy.
• The Investor (Buyer): This is the individual or company that purchases the life insurance policy. The investor becomes the beneficiary of the policy and is entitled to the full death benefit upon the death of the original policyholder.
• The Viatical Settlement Provider: This is a licensed entity that facilitates the transaction between the policyholder and the investor. They evaluate the policyholder’s life expectancy and the value of the insurance policy to determine an appropriate settlement amount.

How Do Viatical Settlements Work?

Here’s a step-by-step process of how a viatical settlement works:

1. Eligibility Determination: To qualify for a viatical settlement, the policyholder must be diagnosed with a terminal illness, typically with a life expectancy of two years or less. The life insurance policy must also be valid and in force.
2. Policy Valuation: Once the policyholder decides to pursue a viatical settlement, the viatical settlement provider assesses the policy’s value. Several factors influence the policy’s worth, including the policy’s face value (death benefit), the premium payments, and the policyholder’s life expectancy.
3. Offer and Agreement: After the valuation, the provider makes an offer to the policyholder. If the policyholder accepts the offer, they sign over ownership of the policy to the investor. The policyholder receives a lump sum payment, which is typically between 50% and 80% of the policy’s death benefit, depending on the individual’s life expectancy and other factors.
4. Policy Transfer: The policy ownership is transferred to the investor, who becomes the beneficiary and takes over premium payments. Upon the policyholder’s death, the investor collects the full death benefit.

Benefits of Viatical Settlements

Viatical settlements can offer several advantages for terminally ill individuals:

• Immediate Financial Relief: Viatical settlements provide policyholders with a lump sum cash payment, which can be used to cover medical expenses, hospice care, or other financial needs. This immediate influx of cash can significantly improve the quality of life for terminally ill individuals.
• Freedom from Policy Premiums: Once the policy is sold, the policyholder no longer has to worry about paying the premiums to keep the policy in force. This can relieve financial pressure for individuals who may no longer be able to afford these payments.
• Tax-Free Payments: In many cases, viatical settlements are tax-free if the policyholder is terminally ill. The Internal Revenue Service (IRS) typically does not tax viatical settlement proceeds, but it’s essential to consult a tax advisor for specific guidance.
• Control Over Financial Decisions: A viatical settlement allows policyholders to access their life insurance benefits while they are still alive, providing them with the autonomy to manage their financial affairs according to their needs and desires.