Life Insurance - Settlement vs. Viatical : ARTICLE

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How Does a Viatical Differ From a Life Settlement?
By Shane Flait ©2011

 If you have a life insurance policy with cash value assigned to it, you can probably sell it. Both Life Settlements and Viaticals involve selling a life insurance policy. This article explains how they differ.

 

Life insurance settlements and viaticals are similar but not identical. Both involve a policy owner and a funding company. The policy owner transfers ownership of his life insurance policy to the funding company in exchange for money. The funding company gets paid from the death benefit when the ‘insured’ dies. He’s usually the owner of the policy who sold it to the funding company.

 

A life insurance policy originates from an insurance company in agreement with a person who contracts to purchase it. But now there is a ‘secondary market’ seeking to buy those purchased policies for the hope of making a profit. Life Insurance Settlements and Viaticals are the result of such secondary purchases.

 

Within this market, funding companies bid for your life insurance policy – i.e. one that was purchased and owned by you. They bid by offering a lump sum amount for your policy based on your health records and your expectation of dying. The longer they expect to wait for your death, the lower they’ll bid. This secondary market with its bid/sell arrangement represents a service and opportunity to policy owners who want to sell their policies for cash.

 

Key difference between Viatical and Life Settlement

 

The difference between these arrangements is based upon the expected life span of the insured. If the insured's life span is short - generally less than two years - the service is deemed a 'viatical'. So viaticals are generally associated with someone diagnosed as terminally ill. Viaticals came first as a remedy to help terminally ill persons to pay for some their living expenses.

 

Now, if the insured is older but in reasonable health and has a life expectancy of 2-15 years, the arrangement is normally referred to as a 'life insurance settlement'. In this case, you’re healthy, older, but simply want cash for your policy.

 

But there are a few more differences between them that show up in practice. Due to the urgent cash needs of a terminally ill person, some states define and license viaticals a bit differently than they do life settlements while other states don’t.

 

Your life settlements broker will need to be licensed in your state and be aware of any legislation affecting the transaction. As an example, the law would require that the funding company provide a minimum amount – typically a minimum percent of the death benefit - to the insured.

 

How things are changing

 

In the 80's, when viaticals began, those terminally ill patients with HIV had their lives dramatically extended by new advances in AIDS drugs. Such medical advances in treatments have created more risk to a funding company engaged in viaticals. So, funding companies are moving towards a greater interest in life settlements over viaticals where they’re as vulnerable to medical advanced cures of terminal illnesses.  

 

National Association of Insurance Commissioners, an insurance regulator, as well as the individual states have put some legislation in place to protect consumers as well as funding companies.  But as these arrangements evolve, so also will the legislative protections. It’s a work in progress.

 

 

 

 

Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com