Glossary
Viatical settlement, defined
The sale of a policy by a terminally ill insured to a third party for a lump sum that is less than the face amount but more than the cash surrender value. The buyer becomes owner and beneficiary, takes over the premiums, and collects the full face amount on the insured's death.
In practice
The seller gives up the policy entirely, so the family receives nothing from it. Compare the offer with an accelerated death benefit under the existing policy, which keeps the remaining face amount for the beneficiaries and usually costs less. Buyers are licensed in many states and the transaction is regulated; the price depends on life expectancy, the face amount and the premiums the buyer will have to carry. Proceeds are generally free of income tax when the insured meets the terminal illness definition, but confirm that with a tax adviser. Payment can affect Medicaid eligibility, and the buyer will have access to the insured's medical records for the rest of their life.
A worked example
Suppose an insured with a $500,000 policy and a life expectancy of eighteen months is offered $350,000 by a settlement company. If the policy also offers an accelerated benefit of $250,000 with $250,000 still going to family, the total reaching the household under the policy is higher; the sale only makes sense if the larger cash sum is needed now. Hypothetical figures.
Applies to: Life Insurance