Definition
A viatical settlement is a financial transaction where a person with a life-threatening or terminal illness sells their life insurance policy to a third party at a discounted rate. The third party becomes the policy’s beneficiary and is responsible for the ongoing premium payments. In return, they receive the full amount of the death benefit once the original policyholder passes away.
Phonetic
The phonetics of the keyword “Viatical Settlement” would be: vahy-AT-i-kuhl SEHT-l-muhnt
Key Takeaways
Viatical settlements are agreements that offer a unique option for individuals who are terminally or chronically ill. Here are the three main takeaways:
- Immediate capital for patients: Viatical settlements allow those with a terminal or chronic illness to sell their life insurance policies at a discounted sum to third-party investors. This gives these individuals access to immediate capital that may be used in managing medical expenses, improving quality of life, or fulfilling personal desires.
- Risks for investors: While these settlements provide an investment opportunity, it’s important to note that it entails significant risks for investors. When investing in a viatical settlement, the return on investment depends on the life expectancy of the insured individual. Longer-than-anticipated life spans could lead to a lower return or even financial loss.
- Regulation and legal considerations: Since it involves sensitive matters such as terminal illness and life insurance, viatical settlements are greatly regulated by state and federal laws. These regulations are put in place to protect both the seller of the life insurance policy and the investor. Violations of such laws could lead to severe legal penalties.
Importance
A Viatical Settlement is a crucial term in business or finance because it involves a financial transaction where a person with a terminal or chronic illness sells their life insurance policy to a third party, usually for less than the policy’s mature value but often more than its cash surrender value. The importance lies in its ability to provide the insured (Viator) an immediate cash benefit, which can be used to cover medical expenses, reduce debt, or contribute to their quality of life during their remaining lifespan. For the third-party investor, it offers the prospect of a higher return on investment upon the viator’s death. This helps balance the interests of both parties involved and brings liquidity to a typically illiquid asset – the life insurance policy. Therefore, understanding viatical settlements can be essential for financial planning, especially in dealing with issues concerning life-limiting illnesses.
Explanation
A viatical settlement is essentially a financial transaction where the owner of a life insurance policy sells their policy to a third party for an immediate payment, which is generally less than the overall death benefit of the policy. The purpose of this arrangement is typically to provide the policyholder, who is often chronically or terminally ill, with a source of funds to afford their medical expenses, or simply to improve their quality of life in their remaining time. The party purchasing the insurance policy, usually an institutional investor or a viatical settlement company, then becomes the policy’s beneficiary and assumes the responsibility of premium payments. The purchaser is betting that they will profit by collecting the death benefit when the original policyholder passes away. Viatical settlements allow individuals with a limited life expectancy to monetize their life insurance policy while they are still alive, offering an alternative to surrendering the policy or letting it lapse, mainly when it is no longer needed or affordable.
Examples
1. Example 1: Mr. Jones, a 70-year-old man, has been diagnosed with a serious illness and given a life expectancy of less than two years. He has a life insurance policy worth $500,000, but due to his medical bills and his desire to enjoy his final years without financial stress, he decided to sell his policy through a viatical settlement. He was offered 70% of his policy’s value – $350,000 – which allows him to cover his expenses and live more comfortably. 2. Example 2: Ms. Smith, a single, retired woman in her 80s with no direct heirs, owns a life insurance policy worth $1 million. Since she has sufficient funds for her remaining years and no family to leave the insurance money to, she decides to sell her policy through a viatical settlement, in order to fund her passion for travelling. She sells her policy for 80% of its value ($800,000) to a viatical settlement company, allowing her to see the world in her remaining years.3. Example 3: Mr. and Mrs. Chen have a life insurance policy worth $700,000. Unfortunately, Mr. Chen has been diagnosed with cancer and requires extensive treatments which are beyond their current financial means. In order to cover the medical expenses, they decided to sell their life insurance policy through a viatical settlement. The settlement company offers them 75% of the policy’s value ($525,000) which they use for his treatment, making the ordeal less financially burdensome.
Frequently Asked Questions(FAQ)
What is a Viatical Settlement?
A Viatical Settlement is a financial transaction where a person with a life-threatening illness sells their life insurance policy to a third party for immediate cash. The third party then becomes the beneficiary of the policy and receives the payout upon the death of the insured.
Who is involved in a Viatical Settlement?
A Viatical Settlement involves the policyholder (viator), a third-party purchaser, and often a broker who facilitates the process.
Why would someone consider a Viatical Settlement?
Individuals might consider a Viatical Settlement when they need immediate financial assistance, often due to high medical bills or other costs associated with living with a life-threatening disease.
What are the benefits of a Viatical Settlement?
The primary advantage is the immediate access to cash. It allows individuals to use their life insurance policy’s value while they are still alive. It can pay for medical treatment, pay off debts, or any other expenses.
How is the payout of a Viatical Settlement determined?
The payout is generally calculated based on the insured’s life expectancy and the face value of the policy. The closer the insured is to their life expectancy, the higher the payout will be.
What are the risks or cons associated with a Viatical Settlement?
One potential risk is that the beneficiary will no longer receive the life insurance payout after the policyholder’s death. Another risk is taxation; the IRS might see the payout as income and therefore subject to tax.
Can all life insurance policies be used in a Viatical Settlement?
Not all insurance policies qualify for a Viatical Settlement. Policies that are eligible are typically those that have no restrictions on transfer to a third party.
Is the Viatical Settlement industry regulated?
Yes, the Viatical Settlement industry is regulated. However, the rules and regulations can vary greatly from one state to another, so it’s crucial for those considering a Viatical Settlement to understand their particular state’s laws.
Are there alternatives to Viatical Settlements?
Yes, alternatives could include accelerated death benefits, life insurance policy loans, selling the policy to a life settlement company (for those who aren’t terminally or chronically ill), or surrendering the policy for its cash value.
Related Finance Terms
- Life Settlement: Another form of settlement, where the policy in question does not necessarily belong to a terminally ill individual.
- Policyholder: The person who owns the life insurance policy, and who may sell it to a viatical settlement company.
- Viatical Settlement Provider: The company or individual who purchases life insurance policies from policyholders with terminal illnesses.
- Return on Investment (ROI): The profit that an investor makes from the viatical settlement, typically after the original policyholder’s death.
- Premiums: Regular payments that the new policy owner (the viatical settlement provider) must make to maintain the insurance policy.
