Life insurance policies serve as financial protection for your loved ones, ensuring they have financial security even in your absence. However, circumstances change, and there might come a time when maintaining your policy no longer aligns with your financial goals. Whether due to a change in beneficiaries, financial hardship, or a serious health condition, the need or desire to monetize your life insurance policy may arise.

Policyholders are usually aware of only two options—either surrender the policy or let it lapse. Both scenarios are less than optimal. Surrendering the policy before it matures often results in receiving a value much less than the potential death benefit, with the policy’s surrender charges further reducing the amount. On the other hand, letting the policy lapse to avoid further premium payments means forfeiting the death benefit altogether and losing the premiums already paid.

Thankfully, there are other options. It’s possible to sell your life insurance policy through either a life settlement or a viatical settlement, providing an avenue to receive a lump sum of cash instantly while not having to pay for the premium anymore. This alternative not only offers financial relief but ensures you receive a value higher than the cash surrender value of the policy.

At the core, both life settlements and viatical settlements revolve around the concept of selling your life insurance policy to a third-party investor for an immediate cash payout. This article explains the differences between viatical settlement vs. life settlement, covering eligibility, benefits, taxes, and process details.

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Key Takeaways

  • Viatical settlements are for individuals with terminal illnesses, providing higher payouts due to shorter life expectancy, often between 50% to 80% of the policy’s death benefit.
  • Life settlements are more suited for healthier seniors, generally yielding a payout between 10% to 25% of the policy’s death benefit.
  • Tax implications are significant: viatical settlements are usually tax-free at the federal level, while life settlements have tax implications based on the amount received over total premiums paid.
  • Engaging with reputable settlement companies streamlines the process, ensuring fair valuation and compliance with legal requirements.
  • The decision between a viatical or life settlement heavily depends on personal circumstances, health condition, and financial needs, requiring a thorough assessment and often professional consultation.

Understanding Viatical and Life Settlements when Selling Life Insurance Policies

The ability to sell your life insurance policy is supported by two primary routes: Viatical Settlements and Life Settlements. These settlements occur in secondary markets where life insurance policies are bought and sold. Understanding the nuances, eligibility criteria, and tax implications empowers a life insurance policyholder to make informed decisions that best align with their financial and health circumstances.

What Is a Viatical Settlement?

A viatical settlement is a financial transaction where a policyholder with a terminal illness sells their life insurance policy to a third-party buyer, usually a viatical settlement company, at a discounted rate in exchange for an immediate cash payout. This payout is typically more than the policy’s cash surrender value but less than its death benefit. The buyer takes over the premium payments and becomes the beneficiary, ultimately receiving the death benefit upon the seller’s passing.

Who Qualifies for a Viatical Settlement?

Eligibility for a viatical settlement predominantly hinges on the policyholder’s health condition. Individuals diagnosed with a life-threatening illness, having a life expectancy of less than two years, generally qualify. However, specific eligibility criteria may vary among different viatical settlement companies and state regulations.

Valuing a Viatical Settlement

The valuation of a viatical settlement is determined by several factors, primarily the life expectancy of the insured and the terms of the insurance policy. The shorter the life expectancy, the higher the payout tends to be. Other factors include the face value of the policy, the type of insurance policy, and the cost of future premiums. Dealing with professional viatical settlement providers helps obtain a fair valuation for your policy.

Why Choose a Viatical Settlement?

Opting for a viatical settlement alleviates financial strain, providing immediate funds for medical treatments, paying off debts, or fulfilling personal desires. It’s a viable choice when facing a chronic illness, especially when the policy’s premiums become burdensome, or the initial purpose of the insurance policy no longer exists.

What Is a Life Settlement?

A life settlement is a transaction where a policyholder sells their life insurance policy to a third-party investor for a one-time cash payment, which is more than the cash surrender value but less than the death benefit. Life settlements are usually chosen by seniors who no longer need or can afford the policy or whose beneficiaries’ circumstances have changed.

Eligibility Criteria for a Life Settlement

Eligibility for a life settlement is typically based on age, health, the type of insurance policy, the policy’s face value, and the cost of premiums. Unlike viatical settlements, life settlements are more suited for individuals who are not terminally ill and have a longer life expectancy.

Valuing a Life Settlement

The valuation in life settlements is influenced by factors like the age and health of the insured, the type of insurance policy, the face value of the policy, and the cost of future premiums. Typically, the payout ranges between 10% to 25% of the policy’s death benefit. A life settlement provider helps appraise the policy and simplifies the transaction.

Why Choose a Life Settlement?

Life settlements provide a significant financial resource for seniors looking to enhance their retirement funds, cover medical expenses, or finance other life ventures. It’s a worthwhile consideration if the life insurance policy is no longer needed or if the premiums have become unaffordable.

Similarities Between Viatical and Life Settlements

Viatical and life settlements offer a pathway for policyholders to monetize their life insurance policies. They involve the sale of the policy to a third-party buyer who then assumes the responsibility of premium payments and becomes the policy’s beneficiary.

Getting A Lump Sum Payment of Money

Viatical and life settlements provide policyholders with a lump sum of money, which can be a financial lifeline in challenging times. The amount received from these settlements can be used for various purposes, including paying off debts, covering medical expenses, or enhancing the quality of life during retirement or a serious illness.

The Third-Party Processing Mechanism

The mechanism of both settlements involves transferring the ownership and beneficiary designation of the life insurance policy to a third party, which could be a settlement company or an individual investor. This third party continues to pay the premiums of the policy and, in return, receives the death benefit upon the passing of the original policyholder.

life settlement vs. viatical settlement infograph

Differences Between A Viatical Settlement vs. Life Settlement

Though viatical and life settlements may seem similar, they cater to distinct demographic and health status groups and come with different regulatory and tax implications.

Amount of Money Received

The amount of money you can expect from a viatical or life settlement largely depends on a combination of factors, including the policy’s face value, the premiums, the life expectancy of the insured, and the type of policy being sold. Here’s a comparative breakdown:

Viatical Settlements:

In viatical settlements, the amount received is often significantly higher than in life settlements due to the shorter life expectancy of the seller. The payout can range between 50% to 80% or more of the policy’s death benefit. The dire health condition of the policyholder accelerates the timeline for the investor to receive the death benefit, increasing the settlement offer.

Life Settlements:

Life settlements generally fetch a lower payout of 10% to 25% of the policy’s death benefit. The longer life expectancy of the seller implies a longer duration for the investor to cover the premium payments before they receive the death benefit. This extended timeframe usually results in a lesser payout to the policyholder.

Eligibility Criteria: Health and Age

Viatical settlements are primarily for individuals who are chronically ill and have a life expectancy of two years or less, irrespective of their age. On the other hand, life settlements are generally targeted towards healthier seniors, typically aged 75 and above, with a life insurance policy of $150,000 or more.

Tax Implications: What to Expect

Tax implications play a major role when considering either settlement. Generally, viatical settlements are tax-free at the federal level due to the severe health conditions of the policyholder, although some state taxes may apply. Life settlements, on the other hand, have tax implications based on the amount received over the total premiums paid into the policy. Consulting a tax or financial advisor is advised to understand the full tax implications.

Medical Requirements: A Closer Look

The medical underwriting process in both settlements is crucial in determining eligibility and valuation. Viatical settlements require detailed medical records and documentation of the terminal illness, whereas life settlements may require a simpler health assessment, given they are often targeted at healthier seniors.

Deciding Between a Viatical or Life Settlement

The decision between opting for a viatical or life settlement boils down to personal circumstances, health conditions, and financial needs.

Assessing Your Personal Circumstances

Evaluate your financial needs, the urgency of those needs, and how your health condition impacts your eligibility for either settlement.

Implications for Your Beneficiaries

Consider how either settlement type will impact the financial future of your beneficiaries, especially in terms of forfeiting the death benefit.

Benefits: A Look at Potential Payouts

Analyzing the potential payouts and comparing them against the premiums saved and the cash surrender value of your policy will provide a clearer picture of the financial benefit of either settlement.

Qualification Criteria: Health, Age, and Policy Metrics

The qualification for either settlement heavily leans on the policyholder’s health status, age, and specifics of the insurance policy, such as the type, face value, and premium costs. A comprehensive understanding of these metrics is vital in determining eligibility and the potential financial benefit from the settlement.

Tax Implications: Understanding the Financial Impact

Consulting with a tax professional to understand the tax implications of either settlement type is highly important to avoid any financial surprises.

Evaluating Other Financial Alternatives

Before diving into a settlement, it’s wise to explore other financial avenues like borrowing against the policy or utilizing riders like an accelerated death benefit or terminal illness rider that may provide financial relief while preserving some benefits for the beneficiaries.

Engaging with A Viatical and Life Settlement Company

Life and viatical settlements can be complex and overwhelming to manage. Hence, engaging with a professional settlement company specializing in these transactions is a prudent step. These companies have the experience and expertise to manage the process where investors purchase life insurance policies from policyholders. Here’s a breakdown of the process and the benefits it offers:

  1. Selection of a Reputable Company:
    1. Research: Start with thorough research to identify reputable companies with a history of fair dealings and positive client testimonials.
    2. Accreditation: Check for necessary accreditations and affiliations that vouch for the company’s integrity and professionalism.
    3. Comparison: Compare multiple companies on parameters like experience, offered services, and client reviews to make an informed choice.
  2. Initial Consultation:
    1. Policy Assessment: During the initial consultation, the company will assess your policy, health condition, and other relevant factors to provide a preliminary estimate.
    2. Education: The company will educate you on the process, the legal requirements, and what to expect throughout the transaction.
  3. Documentation and Evaluation:
    1. Gathering Documents: You’ll need to provide necessary documents such as the insurance policy, recent premium statements, and medical records.
    2. Medical Underwriting: The company will conduct a medical underwriting process to ascertain your life expectancy, significantly impacting the offer amount.
  4. Receiving Offers:
    1. Marketplace Introduction: Your policy will be introduced to a network of investors. Receiving multiple offers helps ensure you get a fair value for your policy.
    2. Offer Evaluation: The company will help you evaluate the offers and select the one that best meets your needs.
  5. Closing the Transaction:
    1. Legal Compliance: Ensure all legal formalities are completed per the state laws governing life and viatical settlements.
    2. Funds Transfer: Upon successful closing, the funds will be transferred to you, and the new policy owner will take over the policy.
  6. Post-Transaction Services:
    1. Record Keeping: The company may offer services like record-keeping and providing necessary documentation for tax purposes.
    2. Advisory: Some companies provide advisory services to help you manage the proceeds tax-efficiently.

Why Opt for a Viatical or Life Settlement?

Opting for either a viatical settlement or life settlement provides immediate financial relief by converting a permanent life insurance policy into a lump sum of cash.

What factors affect how much I would receive from my settlement?

Several factors may influence how much money you would receive from a viatical or life settlement:

  • Policy Face Value: Policies with higher face values often attract higher settlement offers.
  • Policy Type: Certain types of policies, like universal or whole life insurance, are more favorable in settlements compared to term policies.
  • Premium Amounts: Lower premium amounts are preferable as they result in lower carrying costs for the investor.
  • Life Expectancy: Shorter life expectancy generally results in higher settlement offers.
  • Health Condition: The severity of health conditions directly impacts the life expectancy and the settlement amount.
  • Market Demand: The demand and supply dynamics in the secondary market for life insurance also play a role in determining the settlement amount.

What is the difference between surrendering vs. selling a life insurance policy?

Surrendering a life insurance policy provides the cash surrender value, often lower than what is obtained from selling the policy through life and viatical settlements.

About the Author: Lacey

Lacey is a compassionate and dedicated marketing director at American Life Fund, a leading life and viatical settlement company. Lacey has made it her mission to help patients with life-threatening illnesses and their families get the financial support they need during difficult times.

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