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What is a Viatical Settlement?

A viatical settlement is an arrangement in which an individual who is chronically or terminally ill sells their life insurance policy at a discount from its face value for ready cash. In exchange for the cash, the seller of the life insurance policy relinquishes the right to leave the policy’s death settlement to the beneficiary of their choice.

The buyer of the viatical settlement offers the seller a lump sum cash settlement and continues to pay all the premiums left on the insurance policy. The purchaser becomes the sole beneficiary and cashes the full amount of the policy when the original owner dies.

You can use the cash settlements from a viatical settlement however you wish. Typically,  viatical settlements are used to settle final and healthcare expenses.

What is the Primary Feature of a Viatical Settlement?

Fundamentally, it is the prepayment of a death settlement at a reduced rate. However, it is essential to note that the cash settlement is provided in exchange for the transfer and sale of the ownership rights of the life insurance policy.

Practically, the settlement provider takes over the ownership of the life insurance policy and eventually receives the death benefit.

To qualify for a viatical settlement, the policyholder must agree to share certain personal and medical records with the prospective investors. The information may include prescription records and any treatment records, the policy holder’s identity, or a response to a medical history questionnaire or interview.

When the broker ascertains that the viatical settlement is the best option for their client, the next step is for the broker to contact the insurance provider to confirm the authenticity of the information provided. The policy holder’s doctor then provides a signed statement indicating that the seller is of sound mind and not being pressured to sell the policy.

Once the paperwork is done, the viatical provider then pays the settlement proceeds into an escrow account during the transfer process. The escrow account is held by a neutral third party who makes sure that the seller receives the funds he or she is promised and to make sure that the buyer receives the policy.

The funds that the policyholder gets can be utilized for anything the insured desires. However, this transaction means that the insured relinquishes all the rights to their life insurance policy. As such, the policy holder’s beneficiaries will not receive any financial settlements if the insured died. This means that the insurance holder is no longer responsible for paying the monthly premiums or any other maintenance costs related to the insurance policy.

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What is the Name Given to the Policyholder who Enters into a Viatical Settlement Contract?

A viator is the owner of an insurance policy who seeks or enters into to enter into a viatical settlement contract.  A viator is the owner of a life insurance policy insuring the life of an individual who has a life threatening or catastrophic illness or condition.

The viator enters into an agreement under which the viatical settlements company will pay anything of value or compensations. The compensation is less than the expected death benefit of the insurance policy. In return, for the viator’s assignment, sale, transfer, or bequest of the death benefit or ownership of the insurance policy of the viatical settlement company.

A viator may also include an individual insured under a group life insurance policy who is not prohibited from assigning his or her benefits or rights and who assigns those benefits or rights by a viatical settlement.

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

The difference between a life settlement and a viatical settlement has to do with the life expectancy of the insured. In a life settlement, the insured is normally elderly, aged over 65 years old with a life expectancy of five years or more. In a viatical settlement, the insured is a terminally ill patient of any age whose life expectancy is less than five years.

Viatical Settlement Taxation – When is it Taxable?

Terminally Ill

Viatical settlement payouts are federal income tax-free if the policyholder is terminally ill and a physician has certified a life expectancy of fewer than two years. The payout is considered an advance of the life insurance benefit

Chronically Ill

Viatical settlements are federal income-tax-free when the proceeds are utilized to cover out-of-pocket chronic long-term care expenses. Expenses not covered by Medicare, Medicaid, long-term-care insurance, or health insurance. To be considered long-term care expenses the insured must be unable to perform two or more activities of daily living, also known as ADLs. The ADLs are bathing, dressing, eating, transferring (such as from a wheelchair to a bed), toileting, and continence.

The policyholder must also sell the insurance policy to a licensed life settlement provider. The purchaser should be a regular buyer of life insurance policies and should abide by specific requirements governing the Viatical Settlement Model Act.

State tax law is different than Federal income tax law. Some states adhere to different requirements, but most states follow the federal taxation guidelines on viatical settlements.

What is a Viatical Settlement Broker?

A viatical settlement broker or viatical broker is a licensed professional or firm who, in exchange for a commission or a fee, negotiates viatical settlement contracts between the viatical provider and the owner of an insurance policy. To offer these services, viatical settlement brokers must meet the licensing criteria in most states.

Who does a Viatical Settlement Broker Represent?

A viatical broker represents an individual with an insurance policy looking to obtain a viatical settlement. They negotiate the insured’s policy to a network of licensed providers in order to get offers or bids on behalf of their clients.

What a Viatical Settlement Broker May Not Do?

The work of a viatical settlement broker is to work with many viatical providers to help you navigate the process, but they cannot sell or buy any policy to an investor. Technically, only a licensed viatical provider can purchase or sell a viatical.

What is a Viatical Settlement Provider?

A viatical settlement provider, also called a viatical provider, is a licensed third-party organization or individual who bids and purchases life insurance policies. The viatical provider may sell benefits and ownership rights to investors.

Conclusion

Viatical settlements may be the appropriate choice for the chronically ill or terminally ill policyholders. The fundamental function of life insurance is to provide financial support to one’s beneficiaries, and in lots of situations, that purpose is still paramount. However, in some cases, the death benefit may no longer be important, and immediate concerns may be more important. Thus, opting for a viatical settlement can be reasonable.

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About the author
Brian Greenberg author
Brian Greenberg
Founder and CEO
Brian is licensed to sell life, health, annuities, and property and casualty insurance in all 50 U.S. states. He is the author of The Salesman Who Doesn't Sell and is a member of the Million Dollar Round Table, an organization that consists of the top 1% of financial advisors worldwide.