A viatical settlement is a way to say that a lot could be going on in someone’s life and they make decisions based on their situation.
Basically, the decision for a viatical settlement is based on the current health state of someone who has a life insurance policy. And also, this settlement proves that life insurance policies could be bought over.
So, in times of crises like chronic health challenges, your life insurance can make you good money if need be and you can use the proceeds accordingly.
However, this can turn out to be a very risky adventure and a serious financial move. Therefore wisdom demands you think it through and properly before you go for this viatical settlement as a seller and also as a buyer.
What is a viatical settlement?
A viatical settlement is a kind of contract where a life insurance policy holder sells their insurance to someone else. Now, this works in a situation where a life insurance policy holder becomes chronically ill or terminally ill.
So, the life policyholder sells their insurance at a discounted price from its face value for a lump of cash. A face value can be said to be the actual cost or the dollar value of the product.
Moving forward, by selling the life policy, the person gives up the benefits associated with the policy and also gives up the right to have a beneficiary of their choice. They use the lump of cash proceeds from the policy they sold to pay for their last days in the hospital and have a comfortable life before passing away.
On the other hand, the buyer begins to pay for the leftover premiums on the policy. Also, the policy benefits will be transferred to the buyer. And they become the sole beneficiary of the policy. When the seller finally passes away, the buyer gets the death benefits instead of the original owner.
How Viatical settlement works
Actually, the viatical settlement is for life insurance policyholders that are terminally ill and on the verge of passing away. So, they go-ahead to sell their policy at a discounted amount. This could be at 50 to 80 percent of the actual value of the policy.
Then, they receive a lump of cash to use for their medical bills for their last days on earth. But they lose all the benefits that come from the policy and the right to choose a beneficiary.
Meanwhile, the buyer waits out the seller’s life expectancy. The returns on the bought policy depend on how long the seller lives. If the seller passes away before their life expectancy, the buyer will receive a higher return on the policy.
However, if the seller lives just after their life expectancy before passing away, the buyer gets lower returns on the policy.
What happens when a seller lives longer?
Most times, plans take a new route away from the way it was thought will go. And this happens with viatical settlements too.
When it comes down to this settlement, things may not go as planned. A terminally ill seller may live way longer than their life expectancy after selling their life insurance policy. When this happens, the buyer may lose part of the policy and pay more premiums you are not supposed to pay if the seller passed away on time.
Life settlement vs Viatical settlement
These two are all related to life insurance policy plans. Although, they differ in the way they are carried out. More so, they both are ways one can sell off their life insurance policy for a lump sum of cash. But here’s what makes them different.
A life settlement is done when the policy owner sells off their insurance for a lump of cash. The buyer takes over everything about the insurance like the benefits and paying of the premiums. However, the sellers do this as very healthy people in good shape.
Meanwhile, a viatical settlement is done when the policy owner sells off their insurance because they are sick and terminally ill.
Are there other options aside from a viatical settlement?
Typically, the answer to this question is a total yes. There is another option for you to get cash for your need and still keep your life insurance. They are the cash value and the Accelerated death benefits provision
Now the cash value is the accumulation inside a life insurance policy. The way it works is that, after you pay your premium, the remainder of the money goes into a type of savings for the policyholder.
The accumulated cash which is called the cash value can be withdrawn and used by the policyholder. So, instead of selling off the life insurance at a discounted rate, the policyholder can withdraw the cash value after accumulating it. However, this cash value works for only permanent life insurance plans.
More so, if your life insurance policy has an accelerated death benefit clause in it, it can pay you part of your death benefit while you are alive. This way, you do not have to sell off your life insurance.
Viatical settlement pros and cons
If you are considering this option for your life insurance, there are Pros and Cons associated with this settlement.
Pros
- You get to stop paying for premiums. Since you sold your policy, the new owner takes over the paying of premiums.
- Also, you get a lump sum of cash that you can use for your medical bills or travel for a better life.
Cons
- Your beneficiaries lose out on the benefits of the insurance
The debts that the benefits can offset remain with your family and it will attract your creditors to take over your properties.
In conclusion, before you set out to sell your life insurance plan, weigh your options critically and make sure your move does not spoil things in the future for you and your family. And be sure to use a reputable company that sorts out viatical settlements. This goes for the buyer.
