Life Insurance Settlements (Viaticals)

 

Life Insurance Settlements (Viatical Settlements)

Life Insurance Settlements

Life Insurance Settlements or viatical settlements as they are also known is the process of selling the cash payout of your life insurance or portion thereof for upfront cash.

So why would anyone sell their life insurance benefits?  Well in some cases, the life insurance might be no longer necessary.  If for instance the life insurance policy was secured to protect a dependent or spouse but that beneficiary dies first, then that need for protection no longer exists.  

Other times, a portion of the life insurance policy proceeds might become necessary to pay off bills, prevent foreclosure, pay health related expenses, or just simply to live on.  John Meecham was diagnosed with terminal cancer and was unable to work.  The house payments had gone unpaid for several months and disaster seemed imminent.  By selling off half of his $2 million life insurance policy, John was able to pay off his house and do a bit of traveling with his wife before he died a year later.

How life settlements (viaticals) work

Viatical settlements are pretty straightforward. A policyholder who can demonstrate that he has been diagnosed with a terminal illness sells his policy to a settlement company for a fraction of its face value, depending on estimated life expectancy. People over age 70 can also often find buyers as well.

With the life insurance policy in now owned, the purchasing company solicits investors who receive the death benefit when the viator dies. Out of its portion of the investment, the viatical company pays premiums on the policy to keep it in force until the viator dies. In some cases, the company may require that investors pay the premiums.

Any type of insurance can be used in a "viatical settlement" including whole life, universal, term, or group life provided by an employer. But the policy must allow the viator to assign, or transfer, it to an unrelated beneficiary. The viator must have owned the policy for at least two years before he/she sells it.  This is done to prevent people from taking advantage of insurance companies by taking out and then selling a life insurance policy when they receive a terminal diagnosis.

Life settlement (viatical) warnings

Viators who are ill and often desperate may be at the mercy of viatical companies. Under a regulation developed by the National Association of Insurance Commissioners (NAIC), viators would be guaranteed to receive a minimum payment that is based on a sliding scale according to life expectancy. 

For instance, a viator with an estimated life expectancy of six months would receive 80 percent of a policy's face value, but someone expected to live 18 to 36 months would receive 60 percent. To date, however, just nine states (Arkansas, Connecticut, Kansas, Louisiana, Maine, Minnesota, Mississippi, Oklahoma, and Vermont) have chosen to adopt the payment schedule for life insurance settlements.  

If you plan on selling off part of your life insurance policy for cash, it is highly recommended that you see a lawyer who is experienced in the value of such things.  It may take a few extra days or you may have to do some shopping, but life insurance settlement agreements can vary tremendously in the amount of money you can pull out.

In one recent study, the same insured with the same policy and same conditions received quotes from 22% of face value to over 60% of face value.  Do your shopping and don't take the first offer.  In the same study, it was found that there was room for negotiation and life settlement buyers often came back with larger offers when the first was turned down.

Disclaimer:  These pages are created to inform and educate the public only.  They are not and should not be considered legal opinions or advice.  You do not and cannot have any client-attorney relationship with SeniorMag or any of its employees.  You should not act upon legal advice found on SeniorMag and are advised to seek professional counsel before taking any action based upon information found on this site.  

 

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