In certain instances, a terminally ill person can initiate a transaction known as a viatical settlement in which the policy owner sells his or her policy to a viatical settlement company in return for a lump-sum payment. Whole, term, and universal policies are eligible for viatical settlements. The amount of the payment that the policy owner (called the viator in this type of transaction) receives depends on the individual's life expectancy, the financial health of the issuing insurance company, current interest rates, and the amount of premiums owed, since the settlement company continues paying the viator's premiums.
Most settlement companies require a viator to have a life expectancy of 36 months or less, although some companies will purchase policies from individuals with life expectancies of up to five years. In many instances, a life insurance policy must be in effect for two years to be eligible for a viatical settlement. Upon the death of the viator, the settlement company receives the full value of the life insurance policy.
A good place to begin a search for a settlement company is to contact the Life Insurance Settlement Association (LISA) at www.viatical.org.
One attractive feature of viatical settlements is the tax-free status of proceeds for qualifying individuals. To qualify for tax-free proceeds, an individual typically must have a life expectancy of less than 24 months, although exceptions exist for certain chronic illnesses. To receive the tax benefits, a viator must do business with a settlement company that is properly licensed in the state where the transaction takes place. In states that do not require licensing, the settlement firm must comply with the National Association of Insurance Commissioners' (NAIC) Model Act and Regulations on Viatical Settlements.
It's important to consider the impact a settlement would have on beneficiaries, who receive no death benefit when a viator sells a policy to a viatical settlement company. Consider the original purpose of the life insurance policy and whether the need still exists. Also, a viatical settlement may reduce Medicaid, Social Security, and other government benefits. If money is owed to creditors or health care providers, they may claim part of the settlement as debt payment.
Also try, as much as possible, to plan for the unexpected. There have been instances of individuals who have been diagnosed with a terminal illness and who have subsequently recovered and enjoyed years of good health. In addition, there is the possibility that a diagnosis can be incorrect. You may want to consider the impact on your heirs should the unexpected happen.
Viatical settlements can provide financial stability and peace of mind while allowing the benefits of a life insurance policy to be utilized. However, a thorough analysis of the benefits and trade-offs, including the impact on beneficiaries, should be explored fully with a qualified life insurance professional before a decision is made.
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