When an individual who is chronically or terminally ill chooses to “cash out” their life insurance policy to a third party, it is called a viatical settlement. The amount of the payout is somewhere between the cash surrender value and the death benefit value. Selling the policy to a third party means they will get more cash than they would if they sold it for the face value, making it an idea worth considering. That translates to more money for medical or end-of-life expenses.
There are a number of things to consider when making the decision whether or not to liquidate a life insurance policy. There are businesses that have particular experience servicing those types of transactions and viatical settlements who can provide sound advice.
Qualifying for a viatical settlement
In order to be classified a viatical settlement, the individual’s case must be defined as either terminally ill type or chronically ill type. Terminally ill is defined as life expectancy of less than 24 months. Chronically ill is defined as someone not being able to take care of themselves by performing basic day-to-day activities.
Transacting the sale
The process for obtaining such a settlement is fairly straightforward. The individual makes contact with a third party that handles viatical insurance settlements. After providing the policy information, you will be offered an amount of money which will exceed the surrender value. If you accept the offer, you will sign over the ownership of the policy to the third party and receive the cash. However, you must continue to make the premium payments. The third-party buyer takes responsibility of all matters related to the policy and of course receives the death benefit when you die. This fact brings up a significant disadvantage in that by transacting a viatical settlement, there will be no payout to your previously named beneficiaries.
Why not a life settlement?
Different from a viatical settlement, a life settlement also entails liquidating a life policy, except the qualifications are different. Whereas a viatical settlement is meant for those with terminally or chronically-ill individuals, with a life settlement, any person that is at least 70 years old and has a policy with a face value of $100,000 or more can qualify. For instance, if an individual was involved in an accident and is in need of funds to pay for a car accident attorney, selling one’s policy for a life settlement may be a viable option.
There are many good reasons why a viatical settlement is the better decision, though. There are situations where it is almost a necessity for some people to invest in one. For instance, you have a term policy that is expiring and it would be too expensive to replace. Therefore, you could convert the policy into a regular life policy and sell it. Another reason may simply be that a terminally or chronically ill person can no longer afford their monthly premiums due to medical or day-to-day living expenses. As such, selling is their only option.
Do the homework
Although the process of selling a policy is straightforward, it doesn’t mean the decision making process is simple. There are several things to research and consider when making the decision. Will the payout be taxable? Can it affect my Social Security or Medicaid? Could my creditors have claim to any of it? The answers to these questions and others can vary with individual circumstances and should be investigated.
Prior to actually transacting the sale, it is important that you understand your financial situation clearly and how the “cash out” will benefit you. Know how much money you will need in retirement is key to know how the funds can be used to their best benefit. There are excellent online tools and information to help with this part.
The chronically or terminally ill face unimaginable challenges every day, and to have a lump sum of cash at their disposal would be a true godsend. It can take a heavy financial burden from their lives by helping to pay medical bills, day-to-day living expenses, or just improve the quality of their lives.
