Viatical Settlements Explained

Published May 24, 2024

Picture representing how viatical settlements allow terminally ill persons to sell their life insurance policies.

Table of Contents

What is a Viatical Settlement?

A viatical settlement describes the transaction through which a chronically or terminally ill individual sells their life insurance policy to a third party buyer. Due to distinct health qualifications, viatical settlements typically pertain to insureds with life expectancies of less than two years (terminally ill), or those who can no longer perform two or more of the activities of daily living (chronically ill).

Viatical settlements allow chronically or terminally ill persons to receive a lump sum of cash worth more than the policy’s surrender value but less than the death benefit. When a third-party partakes in buying life insurance policies from terminally ill or chronically ill policyowners, the policyowner receives an immediate cash payment and the buyer takes over all premium obligations and receives the policy’s death benefit when the insured dies. Viatical settlements have a variety of distinct features and benefits. Every case is different, but this article breaks down the basics—what viatical settlements are, why you should consider a viatical settlement, and how you can take the next steps.

What Are the Primary Features of Viatical Settlements?

For the chronically or terminally ill, a viatical settlement can dramatically improve end-of-life quality—easing worry and providing great financial security to relieve unnecessary stress. Here are some of the main reasons why an increasing number of people are opting to pursue viatical settlements, and what it can mean for you if you choose to go down this path:

  • Forgo costly premiums. Premiums on life insurance policies are notoriously high —and growing. In many cases, increasing premium costs alone are enough to cause a policyowner to surrender their policy or allow it to lapse or expire. As such, a viatical settlement provides permanent relief from these premiums with an additional cash value incentive.
  • Generate real-time cash flow. Many chronically or terminally ill insureds require financial assistance in the later stages of illness. And for those without a serious illness but who are simply at an age where they need round-the-clock care, long-term medical expenses can be a heavy financial burden for even high-net worth individuals. In the current low-interest rate environment, there’s little opportunity to generate income from retirement savings. A viatical settlement offers real-time cash flow for eligible individuals, providing immediate financial assistance when it’s needed most.
  • Improve end-of-life quality. Increasingly, older adults, seniors, and those struggling with illnesses like terminal cancer are seeking a life insurance payout to make the most of the money they have while they’re still alive to enjoy it. A viatical settlement is an opportunity to gain an additional source of income, and can be put towards any end-of-life-enhancing experiences or purchases. There are no restrictions on what you can do with the settlement cash. This may be a particularly intriguing opportunity for policyholders whose beneficiaries are already financially stable, and do not need the death benefit they would otherwise receive.
  • Receive a return on a life investment. Amazingly, nearly 90% of universal life insurance policies never pay a death claim. Rather than lapsing an unwanted or unneeded policy, a viatical settlement can allow policyowners to receive more cash than they would otherwise receive. Receiving a return from a viatical settlement can bring a bit of financial peace and satisfaction to chronically or terminally ill policyowners who would otherwise receive less (or no) cash by surrendering or letting it lapse.

Of course, every case is different. For some, the benefits of a viatical settlement may not outweigh the risks, the solution may not fit their personal circumstances, or it may not align with their financial priorities. While this isn’t an exhaustive list, it does outline the major benefits and financial advantages to consider when evaluating whether a viatical settlement is right for you.

Why Are Viatical Settlements Popular in Today’s Economy?

Viatical settlements haven’t always been as common or accessible as they are now. But the conditions of our current economic environment have made them an increasingly attractive option for chronically or terminally ill policyowners. In today’s low-growth, near-zero interest rate environment, profitable investment opportunities, like viatical settlements, can be few and far between—especially for those who are older, incurring substantial medical expenses, or living primarily off of savings.

By monetizing your life insurance policy through a viatical settlement, you can get a cash return on the premiums you’ve been paying for years—opening up an additional source of income to meet immediate medical needs, ensure future financial comfort, or simply gain greater joy from the time you have left. Remember: there are no restrictions on where you might choose to spend your viatical settlement payout. Pay medical expenses. Buy a car. Pay for a grandchild’s education. Vacation somewhere you’ve always longed to go. It’s your money to use as you see fit.

Another major economic factor driving viatical settlements is the rising rates of medical care and medical expenses as seniors live longer than ever before. Healthcare expenses related to chronic or terminal illness can include insurance payments and premiums, long-term care facility expenses, repeat medical testing, treatments, therapies, and any necessary drugs, prescriptions, or medications. As someone incurring one or more of these costs yourself, you understand the financial burden firsthand. So as the costs of testing and treatments continue to rise—and the chronically ill continue to incur them for potentially years on end—financial relief from a viatical settlement can offer a final retainer on financial stability.

How Do You Get A Viatical Settlement?

Wondering how to get a viatical settlement? If you and your policy qualify, you can work with a viatical settlement provider to obtain a settlement. These professionals can help assess the value of your policy and facilitate its sale for a generous and flexible payout.

Viatical Settlement Providers

Viatical settlement providers are licensed companies that work with policyowners to purchase their life insurance policies. Though providers aren’t bound to fiduciary duty, working with a provider you trust (like Coventry) is one way you can receive a significant payout.

Key terms

New to the world of viatical settlements? The terminology can be confusing. Here are some common terms you may encounter.

Viatical settlement: A viatical settlement is the sale of a life insurance policy for cash by someone who is terminally ill (with a life expectancy of two years or less) or chronically ill. While the process is similar to that of a life settlement, there may be some favorable tax treatment for those who qualify for a viatical settlement.

Cash surrender value: Over time, permanent life insurance policies (whole life insurance and universal life insurance, among others) may accrue cash surrender value, a vested amount that will be granted to the policyowner upon early termination of the policy. This surrender value comes from the savings or investment account component of certain policy types.

Face value:The face value is the amount a policy will pay out when the insured dies—also known as the death benefit. When you pursue a viatical settlement, you will receive less than the face value, but more than the cash surrender value.

How Do Viatical Settlements Work?

If you are chronically or terminally ill and no longer need or can afford your life insurance policy, viatical settlements may be a good option. Viatical settlements provide generous payouts that chronically or terminally ill individuals can use to cover any pressing costs—such as medical services, healthcare assistance, or travel for treatments—or for anything else they wish. The process of obtaining a viatical settlement follows the same steps as life settlements, though viatical settlements typically close faster due to the quickly declining health of the insured. Follow the steps below to conduct the sale of your policy by working with a licensed viatical settlement provider.

Step 1: Determine your eligibility.

The first step in pursuing a viatical settlement is determining your eligibility. You can do this by contacting Coventry Direct.

What makes me eligible for a Viatical Settlement?

Eligibility for a viatical settlement is contingent on certain health qualifications. The insured must be terminally ill (with a life expectancy of two years or less) or chronically ill (unable to perform certain daily activities on their own). Find out if you qualify for a viatical settlement policy in a few steps.

Step 2: Provide health authorization and policy details.

Once you have confirmed your eligibility, you can coordinate the sale of your policy to a licensed viatical settlement provider. Policyowners will need to give providers authorization to access information about the insured person’s health and their policy. This documentation can include the insured’s medical records and life insurance policy details.

Step 3: A licensed provider conducts a detailed analysis.

When the provider is in possession of all proper documentation, they will conduct an in-depth review of the policy and insured person’s medical records to see if the case qualifies for a viatical settlement. Once the provider has confirmed eligibility, they may make a formal offer for the viatical settlement of the policy.

Step 4: Evaluate your offer.

After you receive a formal offer from a licensed provider, the next step towards obtaining a viatical settlement is deciding how to move forward with the offer. Depending on your personal and financial health, you can either accept the offer in full or try to come to a partial agreement with the provider. You may have the option of retaining a portion of your death benefit while removing your obligation to pay future premiums through a Retained Death Benefit. Alternatively, you could also decide to sell your whole policy for its maximum value.

Step 5: Close the transaction.

When you accept an offer, the funds from the settlement will temporarily be held in escrow until all closing documents are complete. Once the insurance carrier officially recognizes the provider as the policy’s new owner, you will be able to access the settlement payout.

Types of Viatical Settlements

Viatical settlements are only available to individuals who fall into one of the two following categories: those who are terminally ill and those who are chronically ill. Though these categories may sound similar, when it comes to viatical settlements, there are distinct criteria surrounding each.

    • Terminally ill: This individual has a life expectancy of less than 24 months. The payout provided by viatical settlements can help the terminally ill pay for high medical costs or can go towards increasing the insured’s quality of life before they pass away.
    • Chronically ill: The individual can no longer perform at least two activities of daily living (ADLs) such as feeding, dressing and grooming, walking or ambuting, toileting, bathing, and transferring (being able to move from one body position or physical location to another, including with help from an assistive device). The term chronically ill could also refer to individuals who require significant supervision to maintain their health and safety. A viatical settlement can help these individuals pay for additional supervision costs or healthcare needs.

See if you qualify for a viatical settlement by completing our secure online form.

How are Viatical Settlement Payouts Determined?

If you are considering a viatical settlement, you may be curious about how much money you could receive from your policy’s sale. Here are a few factors that go into the payout calculation.

Life expectancy: The estimation of the insured’s remaining life based on their medical diagnosis and age is a key determining factor of viatical settlement payouts. The greater an insured’s life expectancy, the more premium payments the provider expects to make before receiving the death benefit. The more a provider expects to pay, the less money they will allot to the upfront settlement payout.

Sum of remaining premium payments: When providers spend more on expensive premiums, they have less to spend on the payout for your sale. For this reason, more expensive premium payments generally result in lower viatical settlement payouts.

Size of insurance policy: The size of a life insurance policy is reflected in the size of the death benefit triggered when the insured dies. With larger policies, providers typically provide a larger payout for policyowners because they know they will receive a considerable cash sum upon the insured’s death.

Type of insurance policy: Viatical settlements do not require a specific type of life insurance. However, the different policy types can come with varying payouts. There are two broad categories of life insurance: permanent life insurance—which includes whole, variable, and universal life insurance—and term life insurance. Because providers are required to pay more than the cash surrender value, the total amount paid as a percentage of the death benefit may be higher than a policy with no surrender value.

Though policyowners will need the services of a licensed provider to determine the exact payout their policy would earn, these criteria can help policyholders understand how their situation may impact the payout amount.

Pros and Cons of Viatical Settlements

As with every type of policy sale, viatical settlements come with both benefits and drawbacks. Whether the positives outweigh the negatives comes down to the importance placed on each of the following considerations:

Pros of Viatical Settlements

  • Earn more than the cash surrender value: With a viatical settlement, the cash payout is higher than the cash surrender value and even the value of accelerated death benefits (ADBs), a popular alternative to selling your policy.
  • Forgo expensive premiums: Viatical settlement providers take on life insurance premiums for the life of the policy, providing policyowners with lasting relief from the stress of expensive payments.
  • Quickly sell your policy: Due to the precarious health of the insured, viatical settlements are typically transacted quickly. This rapid payout process can help those who are chronically or terminally ill pay off immediate debt or pay for urgent healthcare expenses.
  • Enjoy a flexible payout: Viatical settlements give policyowners 100% freedom to use the payout on whatever they choose—house payments, medical bills, or any other personal expenses.
  • Access a tax-advantaged cash sum*: Viatical settlements are essentially tax-free as they are not subject to federal taxation.

Cons of Viatical Settlements

  • Give up the right to death benefits:

When policyowners sell a life insurance policy, they relinquish the right to leave death benefits to beneficiaries.

  • Potentially lose access to financial assistance: If you sell your policy in a viatical settlement, you may become ineligible for financial assistance programs such as Medicaid.

What is the Difference Between a Viatical Settlement and a Life Settlement?

Viatical settlements and life settlements are both financial options involving the sale of life insurance policies, but they differ in key aspects. Viatical settlements are typically reserved for individuals facing a terminal illness, allowing them to sell their policy for immediate funds to cover medical expenses or improve their quality of life. On the other hand, life settlements involve the sale of policies by seniors who may no longer need or afford them, but they are not necessarily facing imminent health issues. Understanding these distinctions is crucial for making informed decisions about financial planning and ensuring the right choice based on individual circumstances.

There are three key differences between a viatical settlement and a life settlement.

1. Policyowner Health

The health of the policyowner determines whether they qualify for a viatical settlement or a life settlement. A viatical settlement occurs when a terminal or chronically ill person sells their life insurance policy for a cash payout to a third-party buyer. This insured typically has a life expectancy of less than two years. Alternatively, a life settlement is also the sale of a life insurance policy to a buyer, but the seller does not require a terminal or chronic diagnosis to qualify. There are other qualifications that must be met for a life settlement to occur — including a death benefit minimum of $100,000 and a change in health status of the insured — but the health of the policyowner does not need to be terminal in order to qualify.

2. Proceed Value

Another difference between a viatical settlement and a life settlement? The settlement proceeds in a viatical settlement tend to be higher than in a life settlement. Since the policyowner has a shorter life expectancy in a viatical settlement, the licensed life settlement provider can offer more as they will have fewer premium payments to make before receiving the death benefit. While viatical settlements tend to pay slightly higher in proceeds, both viatical and life settlements offer a more significant payout than surrendering the policy back to the insurance company. On average, viatical settlements garner six times the policy’s cash surrender value. Similarly, life settlements average four times the payout of the policy’s cash surrender value.

3. Tax Differences

The last difference between a viatical settlement and a life settlement is how they’re taxed.* Viatical settlement proceeds are typically tax-free. The IRS views viatical settlement payments as an advance of the death benefit to the insured. Life settlement proceeds, however, do face some tax penalties. The amount the policyowner paid in premiums is tax-free. Any earnings up to the cash surrender value are taxed as ordinary income. And finally, any proceeds above the cash surrender value are taxed as capital gains.

Find out what your life insurance policy is worth if you’re interested in selling.

Viatical Settlement Alternatives

For those who aren’t certain that a viatical settlement is right for them or who aren’t eligible, there are a number of alternatives they can explore. Each alternative has its own pros and cons, so it’s best to speak with a financial advisor to determine the right option for each individual’s needs.

Policy Loans

Borrowing against life insurance from the accumulated cash value is known as a policy loan. Policy loans give you the flexibility to repay the loan on your own schedule and the comfort of knowing the money you repay is going back into your policy instead of to a lender.

It is important to note that any outstanding loan balance at the time of the lender’s death will be deducted from their policy’s death benefit. This remaining loan balance could also be taxed if your policy ends before you pay the loan back.

Accelerated Death Benefits

If you have been living in a long-term care facility for at least six months or are terminally, critically, or chronically ill, you may be able to access Accelerated Death Benefits (ADBs). Accelerated Death Benefit provisions exist in many permanent and term life insurance policies, allowing policyowners with shortened life expectancies to access a portion of their death benefits early. For those who can’t afford the minimum payments to keep up their policy, this provision can provide access to a percentage of the policy’s face value without forcing policyowners to surrender or sell their life insurance.

Though ABDs offer many advantages, the withdrawal caps present in many ABD provisions could mean policyowners still have to pay monthly premiums to maintain their policy if they don’t withdraw their total death benefit.

Cash Surrender

Certain types of permanent life insurance accumulate cash value over premium payments. Policyowners can surrender one of these life insurance policies, giving up their right to its death benefit, in return for its cash surrender value, performing a cash surrender.

Before deciding to surrender your policy, keep in mind that the cash surrender value is less than the full value of your policy. In addition, you may have to pay penalty fees from canceling your policy early.

Life Settlement

If you aren’t eligible for a viatical settlement and have an active policy with a death benefit of $100,000 or more, you may still be eligible for a life settlement. This type of policy sale functions very similarly to viatical settlements, however, life settlements lack their strict health qualifications. Like viatical settlements, life settlement providers offer significantly larger payouts than their cash values and take on the remaining premiums. Though the settlement payout will still be less than the death benefit and some of what you receive will be subject to taxes, life settlements are a trusted way to extract money from your policy.

Learn more about the tax implications of cashing out life insurance.

*Coventry Direct does not offer tax or legal advice. This material has been prepared for informational purposes only and should not be relied upon for tax or legal advice. Coventry Direct urges you to consult with your own tax or legal advisors before entering into any transaction.

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