Did you know that over $115 billion of life insurance policies owned by individuals over the age of 65 lapses annually, with the money policy owners, had spent being forfeited to the life insurance company?
Most people purchase a life insurance policy because they want their loved ones to receive the policy’s death benefit after they pass away. But if the insurer has a terminal illness or a chronic illness, then they can use their life insurance policy to pay for medical expenses. Instead of letting their insurance lapse or going into debt because of medical bills, the policyholder can opt for a viatical settlement in exchange for their life insurance policy.
If someone has heard of viatical settlements and have some familiarity with them, they usually ask viatical settlement providers:
- How do you buy viatical settlements?
- Can I actually sell my life insurance policy?
- Is selling term life insurance policy for cash possible?
Viatical Settlement: What is It?
When a policyholder has been diagnosed with a terminal illness or a chronic illness, they can sell their life insurance policy for a cash payment. The lump sum of cash that the policy owner receives is called a viatical settlement. Usually, the policy owner sells their policy to a third party and may take the help of a viatical settlement provider to find prospective buyers. The proceeds from the settlement can be used towards medical expenses, long-term care costs, or nursing home bills.
To qualify for a viatical settlement, the insured person has to meet one of the following eligibility requirements:
- Have a terminal illness and a life expectancy of less than 24 months.
- Have a chronic illness and is unable to perform two or more activities of daily living, including eating, dressing, bathing, or toileting.
For a life insurance policy to be eligible for a viatical settlement, it needs to meet the following parameters:
- The life insurance policy should be older than two years.
- The face value of the policy should be at least $100,000.
- The policy should be a permanent life insurance policy (universal life policy or whole life policy). If the policy is a term policy, then it needs to be converted into a permanent one before the policy can be sold for a viatical settlement.
While the settlement process can be facilitated by a life settlement broker or a life settlement provider, the settlement amount that the policyholder receives will depend on the health status of the policy owner, the premium amount, and whether there are any outstanding loans against the policy.
Viatical settlements have dramatically increased in popularity over the years, prompting state and federal governments to increase protection for consumers. The Health Insurance and Accountability Act of 1996 (HIPAA) is at the heart of these efforts.
The aging of the population has contributed to the increased popularity of viatical settlements. Typically, major health problems develop after age 55, with aging adults developing illnesses such as cancer and diabetes. Because of this, many people need additional funds to pay for expensive medical procedures, treatment, and medication. Viatical settlements have been of great benefit to many chronically ill people because it helps pay costly medical bills.
Viatical Settlement vs. Life Settlement
While life settlements and viatical settlements involve the sale of a life insurance policy for an upfront amount of cash, there are certain key differences between them:
A policyholder qualifies for a life settlement if they are over the age of 65 – they do not have to be ill to receive it.
The purchase value of viatical settlements is higher than life settlements because the insured has a short life expectancy.
Qualifying For a Viatical Settlement
Qualifying for a viatical settlement is very straightforward. Here are the parameters:
- The life insurance policy must be at least two years old
- The policy must have a face amount of at least $100,000
- The insured must have a life expectancy of 24 months or less or have a chronic illness (as described above)
Qualifying for a viatical settlement doesn’t automatically mean that the policy will be sold. Buyers are going to take many factors into account, including:
- The policy’s monthly premium
- The health disorder the insured has
- The stage of the illness (if applicable)
- Outstanding loans against the policy
After visiting with you, a viatical settlement broker can give you a good idea of your life insurance policy’s marketability and what you could expect as far as offers for your policy. They’ll also disclose to you what their fee structure is.
Taxation of Viatical Settlements
Viatical settlements are not subject to federal taxes in most instances. When the policyholder is terminally ill and has a life expectancy of less than two years, then the viatical settlement is treated the same as the death benefits that a loved one will receive when the insured person passes away.
When the settlement is for a chronic illness, there will be no taxes if the proceeds from the settlement are used for long-term care expenses. But if the payout is used for other expenses, then they can be taxed.
Viatical Settlement Providers
Taking the help of a viatical settlement provider can be beneficial for the policyholder. A provider will have access to potential buyers and can get more offers or better offers for your policy. If you are considering using the services of a viatical settlement company, you should consider the following points before making a decision:
- Services they offer.
- Fees they charge.
- Their requirements when it comes to life insurance policies.
- Policies about confidentiality.
- How long they have been in business.
- Successful transactions they have made.
A reputable viatical settlement provider will make sure that the policyholder’s concerns are addressed, and that they have their questions answered.
When to Consider a Viatical Settlement
People most often opt for a viatical settlement when they need to pay for medical expenses, long-term care expenses, or end-of-life expenses. But there are several other reasons why the insured chooses a viatical settlement in exchange for their life insurance policy:
- They don’t want to pay the premiums – If the policyholder no longer wants to make premium payments to the life insurance company, and qualifies for a viatical settlement, then selling their policy could be the best course of action for them. Once they sell their policy, the new owner becomes responsible for the premium payments.
- Their loved ones or beneficiaries don’t require the death benefit – If the beneficiaries or loved ones of the policyholder no longer need the death benefit from the policy, then selling the insurance policy for a cash payout can help pay the medical expenses of the insured.
- Their term life insurance policy is going to expire – Once a term policy expires, then the policyholder does not receive anything for the policy. A term policy cannot be sold for a viatical settlement, but if they have a conversion rider, then they can be converted into a permanent life policy and then sold. If a policyholder has a term policy, selling the policy for a fixed amount of cash is a better alternative to the policy lapsing.
- They want the funds for other expenses – While viatical settlements are usually meant for medical expenses or long-term care expenses, the payout can be used for other purposes. Using the payout for other debts or expenses can lead to taxation of the settlement – but after taxes, the rest of the proceeds can be used to pay for other things.
The Risks of Viatical Settlements
Any type of investment or financial transaction carries some risk. Even though there can be a substantial selling price for a policy, it’s essential to know the risks before proceeding.
Older permanent life insurance policies that the owner has been paying premiums on for many years may have accumulated enough cash value to make it worth more than the policy could be sold for. Chronically ill patients may have a long enough life expectancy that alternative investments would provide a better return than selling their policy. In both of these cases, a viatical settlement may not make good financial sense.
Though the IRS doesn’t usually have policy owners that have sold their policy pay taxes on the proceeds, every situation is different. Each state has different rules concerning the taxation of viatical settlements. A professional should be consulted to find out how a potential settlement could be affected.
Transparency concerning fees by the viatical settlement provider is critical. Sellers need to be aware upfront of all fees and commissions that would affect their payout.
Creditors could possibly claim some or all of the money received in a viatical settlement. A seller with outstanding debts should talk with their financial institution to determine if their payout is at risk.
Alternatives to Viatical Settlements
For someone who doesn’t qualify for a viatical settlement or just isn’t sure if it’s right for them, there are several alternatives to get money from their life insurance policy.
One alternative is a policy loan. There is interest charged on policy loans, but because there is no underwriting required, the money can be accessed quickly. If the loan isn’t paid back by the time the insured dies, the outstanding balance will be subtracted from the death benefit.
Another option is using an accelerated death benefit rider if the policy already has one. With this rider, the insurer pays a portion of the death benefit while the insured is still living.
Finally, policyowners can surrender their life insurance policy. They’ll stop paying premiums, and the life insurance company will calculate the surrender value, which will then be paid to the policyowner.