What is a Viatical Settlement?

A viatical settlement is a financial arrangement that provides individuals with a means to access funds from their life insurance policy before their death. The primary feature of a viatical settlement is the sale of a life insurance policy to a third party, usually a specialized investment firm, in exchange for a lump sum payment. This arrangement can offer significant benefits to policyholders, particularly those facing terminal or chronic illnesses, by enabling them to convert their life insurance benefits into immediate cash. However, there are pros and cons to consider. Please read on…

Viatical Settlement, Pros and Cons

Understanding Viatical Settlements

To fully grasp the primary feature of a viatical settlement, it’s essential to understand the mechanics of this financial tool. Typically, an individual who holds a life insurance policy that does not include “Lifetime Benefits” decides to sell the policy due to an urgent financial need, often related to medical expenses or other critical financial pressures. The process involves a few key steps:

1. Assessment of Policy Value: The individual, also known as the policyholder, contacts a viatical settlement provider who evaluates the value of the life insurance policy. This evaluation considers factors such as the policy’s face value, the insured person’s life expectancy, and the terms of the policy.

2. Offer and Acceptance: Based on the evaluation, the provider makes an offer to purchase the policy. If the policyholder accepts the offer, the provider buys the policy and becomes the new beneficiary. The policyholder receives a lump sum payment, which is generally less than the policy’s face value but more than the cash surrender value.

3. Ongoing Premium Payments: After the settlement, the provider assumes responsibility for paying the policy premiums. In return, the provider will receive the death benefit when the insured person passes away.

4. Payout: Upon the death of the insured, the settlement provider collects the death benefit from the insurance company, which can be a substantial amount, depending on the policy’s face value.

Pros & Cons: Some Benefits and Considerations

The primary feature of a viatical settlement is the sale of the insurance policy for immediate cash, which provides several potential advantages:

-Immediate Cash Access: For policyholders facing terminal illness or severe financial need, a viatical settlement offers a quick way to access substantial funds. This can alleviate the stress of paying for expensive medical treatments, covering living expenses, or fulfilling other financial obligations.

– Relief from Premium Payments: By selling the policy, the policyholder no longer needs to worry about making ongoing premium payments, which can be a relief, especially for those on a fixed income or dealing with mounting medical costs.

– Use of Funds: The lump sum received can be used at the policyholder’s discretion. This flexibility allows individuals to address their specific financial needs, whether they involve medical care, debt reduction, or improving quality of life.

However, there are also some considerations and potential downsides to be aware of:

– Reduced Death Benefit for Beneficiaries: Since the policy is sold to a third party, the original beneficiaries will not receive the full death benefit upon the insured’s death. Instead, the buyer of the policy receives the payout, which can impact the financial planning of the policyholder’s family or loved ones.

– Potential Impact on Eligibility for Assistance: In some cases, receiving a lump sum from a viatical settlement may affect eligibility for government assistance programs, such as Medicaid. It is important for individuals to consider these implications and consult with financial advisors or legal professionals before proceeding.

– Tax Implications: The proceeds from a viatical settlement can have tax implications. While some states and federal regulations might exempt the settlement amount from income tax, it is crucial to understand the tax consequences and seek guidance from tax professionals.

The Primary Feature of a Viatical Settlement:

In summary, the primary feature of a viatical settlement is the conversion of a life insurance policy into immediate cash by selling it to a third party. This financial arrangement provides policyholders, especially those with terminal or chronic illnesses, with a valuable opportunity to access funds that can significantly impact their quality of life and financial stability. While the immediate benefits can be substantial, it is essential for individuals to weigh these advantages against potential drawbacks, such as reduced death benefits for beneficiaries and possible tax implications. As with any significant financial decision, careful consideration and professional advice are key to making an informed choice.

Life Insurance for the Living:

Living Benefit Riders:

For those who may want to address the possibility of future cash needs for either emergency cash or long-term care, you may look into purchasing policies that do allow for Living Benefits – using Life Insurance while you’re still alive!

Many insurance carriers offer life insurance policies with living benefits or long-term care riders. These riders can provide financial assistance if the insured needs long-term care or faces critical, chronic, or terminal illnesses. Here are some notable carriers known for offering such policies:

1. Nationwide
– Policy: Nationwide Life Insurance Policies
– Riders: Nationwide offers various riders, including long-term care riders and critical illness riders, on their life insurance policies.

2. MetLife
– Policy: MetLife’s Universal Life Insurance
– Riders: MetLife provides options for accelerated death benefits, critical illness riders, and long-term care riders.

3. Prudential
– Policy: Prudential’s Permanent Life Insurance
– Riders: Prudential offers several riders including accelerated death benefits and long-term care riders.

4. John Hancock
– Policy: John Hancock Life Insurance Policies
– Riders: Known for their Vitality Program, John Hancock also provides options for long-term care riders and accelerated death benefit riders.

5. Lincoln Financial
– Policy: Lincoln LifeSpan and Lincoln WealthAdvantage
– Riders: Lincoln Financial offers a range of living benefits including critical illness riders and long-term care riders.

6. MassMutual
– Policy: MassMutual Whole Life and Universal Life Policies
– Riders: MassMutual offers riders for long-term care and chronic illness benefits.

7. Transamerica
– Policy: Transamerica Life Insurance
– Riders: Transamerica includes options for accelerated death benefits and long-term care riders in many of their policies.

8. State Farm
– Policy: State Farm Life Insurance Policies
– Riders: State Farm provides options for living benefits riders and long-term care riders.

9. AIG (American International Group)
– Policy: AIG Life Insurance
– Riders: AIG offers various riders including critical illness and long-term care riders.

10. New York Life
– Policy: New York Life Permanent Life Insurance
– Riders: New York Life provides options for accelerated death benefits and long-term care riders.

These carriers offer a variety of policies and riders, so it’s important to compare the specifics of each to find the one that best meets your needs. Additionally, the availability of these riders can vary based on the policy type, state regulations, and individual underwriting requirements. Always consult with a financial advisor or insurance professional to ensure you choose the right policy and rider for your specific circumstances.

If you’d like a free quote, please contact me via the “contact me” page. I will be happy to work with you!

God Bless,

Toni

Here’s a question posed by a member in one of my Facebook Groups I belong to that I’d like to share. It is a “real-world” situation that many people find themselves in simply because they, quite unfortunately, didn’t have life insurance in place at a younger, healthier, age. Here’s the situation:

Hospice Care, Life Insurance & Final Expense Question:

“My grandpa just got put on in-home hospice due to terminal cancer. He maybe has a month or two if we’re LUCKY. He is a Vietnam vet, and they have a house but do not own it outright. Is there any sort of life insurance he could get or any insurance at all to help my grandma after his death with living expenses?”

Possible Reverse Mortgage Solution:

Unfortunately, there were some in the group who suggested a reverse mortgage solution for the grandmother.

Those who know me, also know that I am also a Licensed Real Estate Broker in the state of Massachusetts in addition to being a Licensed Insurance Broker. Please, please, please, think twice before considering a Reverse Mortgage. There are so many loopholes, and agreements. The owner can lose the house regardless. I had one client who did this, and her equity was being whittled away much sooner than she had ever anticipated. Her “attorney” was supposed to look out for her. He didn’t. The Government approval process with the HUD-assigned representative was supposed to look out for her, she didn’t. My client was eventually threatened with foreclosure because they didn’t like the repairs she was required to do “in the agreement,” so they sent her a pre-foreclosure letter. I quickly listed her house and got her out of her Reverse Mortgage situation just in time with approx. 20K in equity left…. Please think twice before doing a Reverse Mortgage. The underlying bank has absolutely NO PROBLEM foreclosing on a widowed woman trying to keep a roof over her head.

Life Insurance Or Mortgage Protection Insurance:

It is unfortunate that they waited too long before looking into Life Insurance. A Whole Life Insurance policy with Living Benefits would have been very helpful in this situation. Even if they had purchased Mortgage Protection Insurance when they mortgaged the home would have helped. It would have paid off the home for her had it been in place prior. From what I understand, as well as those who have more insurance product knowledge than me, suggests that there would be problems getting any Life Insurance coverage within such a short time frame.

As a Real Estate Broker in Massachusetts, and from the short sales I have done, I would definitely NOT go the route of a reverse mortgage. There are soooo many shady people out there, I would advise against it unless she had a well-trusted attorney (one who had nothing whatsoever to do with the Rev. Mortg. co.) who would watch over the transaction – double-check it, triple-check it, and then quadruple-check it. I can tell you, I’ve dealt with reverse mortgage clients who would have lost everything had it not been for me successfully selling their home before all equity was siphoned away by the Reverse Mortgage company.

Fixed Income Annuities & Social Security Benefits:

Please think twice before even considering a Reverse Mortgage. My advice is for her would be to list the home – especially if there’s a good bit of equity left over what’s owed. She could then buy something smaller, even a small condo as it would save her from exterior maintenance. She may also consider moving to a state with a lower cost of living, and invest whatever she has left over into a Fixed Income Annuity that would provide her with additional monthly income. Further, if she was married for over 10 years and he was the top earner in the family over the years, and she is claiming or already receiving Social Security under his name, she will receive additional benefits once he passes.

Bottom Line – Buy Life Insurance!

So, for those who are considering buying life insurance, but haven’t yet, please consider doing so as soon as possible. The younger and healthier you are, the cheaper it is – not to mention you would also be building wealth if it’s a Whole Life Policy. If I had known “then” what I know “now,” I would have purchased my policy a long, long while ago.

I hope this scenario helps to convince those who are on the fence about purchasing life insurance. It is a real-world scenario, and it can happen to you, your loved ones, or someone you know.

God Bless,
~Toni

Toni Nicholas – Currently (06-19-2023) Licensed in MA, MI and FL for Life Insurance and Fixed Income Annuities

Tag: Insurance

Weighing Pros and Cons / Discussion of General Features of a Viatical Settlement