What Is a Viatical Settlement?

An agreement known as a viatical settlement occurs when a person who is terminally or chronically sick sells their life insurance policy for cash at a discount below face value. The life insurance policy seller forfeits the ability to choose a beneficiary for the policy’s death benefit in return for the cash.

In exchange for a lump sum cash payment and any remaining future payments on the life insurance policy, the buyer of a virtual settlement pays the seller. When the original owner of the insurance passes away, the buyer becomes the only beneficiary and receives the whole policy payout.

Getting to Know a Viatical Settlement

Owners of life insurance plans may sell their policies to investors thanks to virtual settlements. At a price lower than the insurance’s death benefit, investors purchase the whole policy or a part of it. The timing of the seller’s death determines the investor’s rate of return. If the seller lives longer than they anticipated, the rate of return will be lower. On the other hand, if the seller passes away earlier than expected, the rate of return will be higher.

A terminally sick person may get instant cash via a virtual settlement, which they can utilize to cover their care and comfort costs in their last days. A virtual payment may be a sound financial management strategy for those who don’t want to sell their property before they pass away and want to keep other assets in their estate.

Viatical Settlement Criticism

A virtual settlement may be very dangerous as an investment. The rate of return is uncertain since it’s hard to foresee when someone will die. If you invest in a virtual settlement, you are speculating on death. Therefore, the greater the life expectancy, the cheaper the insurance. But the longer someone lives, the lower your rate of return is due to the temporal value of money (TVM).

In several states in the U.S., firms that purchase virtual settlements to sell to investors are regulated by state insurance commissioners. For further information and a list of state insurance regulators, see the National Association of Insurance Commissioners (NAIC).

Life Settlement vs. Viatical Settlement

Individuals not suffering a health crisis may also opt to sell their life insurance policy to earn cash, usually called a life settlement. A life settlement varies from a viatical payment because the insured has a longer life expectancy. In a virtual settlement, the insured’s life expectancy is often two years or fewer.

If a life insurance policyholder is seeking a life settlement, they should evaluate all available possibilities for acquiring the requisite funds. There could be a better way to use life insurance coverage.

For instance, a life insurance policyholder may be able to withdraw part of the cash value to fulfill their immediate needs while maintaining the policy in effect for beneficiaries. It could also be feasible to utilize the cash value as collateral for a loan from a financial institution.

An accelerated death benefit (ADB) is also a possibility. An accelerated death benefit frequently pays a portion of a policy’s death benefit before the insured dies. This might give the holder of the life insurance policy the cash required without having to sell the policy to a third party.

Special Considerations

There are numerous aspects to consider before settling on either a viatical settlement or a life settlement:

1. It’s crucial to seek quotations from various firms to guarantee a fair price.
2. Request an in-force illustration or reprojection for your existing policy.
3. Not all funds from a life insurance policy sale may be tax-free; understand all tax consequences before signing a contract.
4. Find out whether any creditors might claim your cash settlement.
5. Understand the consequences of any public assistance that may be applicable, such as the Supplemental Nutrition Assistance Program (SNAP) or Medicaid.
6. The buyer of a virtual settlement is authorized to check on your health state occasionally. Make sure you understand who will receive access to this information.
7. All questions on an application form must be answered accurately and completely, especially regarding medical history.
8. Ensure the virtual settlement provider transfers monies into an independent escrow account to secure the cash throughout the transfer.
9. Find out whether returning the money is possible in the case of the seller’s regret.

Conclusion

• A virtual settlement enables an owner of a life insurance policy to sell their policy at a discount from its face value to an investor in exchange for a one-time amount of cash.
• In a virtual settlement, the insured has a life expectancy of two years or fewer.
• The investor in a virtual settlement pays all future payments remaining on the life insurance policy and becomes the only beneficiary when the insured dies.
• A virtual settlement might be dangerous since the rate of return going into the investment is unclear and relies upon when the seller dies.
• A life settlement varies from a viatical settlement in that the insured wishing to sell their life insurance policy has an estimated life expectancy of more than two years.