Introduction:
A viatical settlement is a life settlement that permits the policyholder to sell their life insurance policy and get a lump sum payment in exchange for a death benefit reduction. Viatical settlements are commonly used by policyholders who have a terminal illness and want to secure the death benefit of their policy before they die.
- Eligibility Requirements for a Viatical Settlement:
- Life expectancy: For a viatical settlement to be granted the person insured should not have a greater life expectancy of two years.
- Policy requirements: The life insurance policy has to contain a death benefit of a minimum of $100,000 and be held by the policyholder for at least two years.
- Medical underwriting: The policyholder will be subject to medical underwriting in which their life expectancy and policy value are evaluated.
- Understanding the Value of Your Policy:
- Factors affecting value: The policy value will be decided taking into consideration aspects such as death benefit, the age and health of the policyholder, and the interest rate.
- Determining the offer: A company providing viatical settlements will look into the policyholder’s policy and medical information and give a price for the policy. The offer will be less than the death benefit but greater than the cash surrender value of the policy.
- The Viatical Settlement Process:
- Accepting the offer: If the policyholder takes the offer, they will be given a one-time payment for their policy.
- Terminating a policy: In case of the policy being sold, unless the viatical settlement provider becomes the new owner and beneficiary of the policy, the policy will be terminated.
- Advantages of a Viatical Settlement:
- Access to money: a viatical settlement will enable the policyholders to claim the death benefit of the policy before their death, which can be used to cover medical expenses, provide for living expenses, or give some financial safety to their loved ones.
- Save on premiums: By giving the policyholder no more duty to pay the premiums on the policy, which may give the individual a financial cushion.
- Increase in value: The policyholder is able to get a higher expected cash return on his policy than he would have got in a traditional life insurance settlement or when he would have surrendered the policy.
- Considerations for a Viatical Settlement:
- The estate’s holdings: Through a viatical settlement, the policyholder may receive a smaller amount of money and fewer beneficiaries. It’s good to have a financial advisor or estate planner to sit down with and go over this situation so that you are able to understand your financial situation properly with the viatical settlement.
- Death benefit cutback: The insurance company will redo the death benefit of the policy in a way that pays less out, which can have severe consequences for the policyholder’s beneficiaries.
- Tax issues: Viatical settlements are within the purview of tax laws and therefore, understanding the impact of the tax settlement is important before one even trembles.