Viatical settlement refers to the sale of a policy owner’s existing life insurance policy to third parties for more than its cash surrender value, but at a lower price than its net death benefit. As such, the owner receives a lump sum, while a third-party assumes the new owner of the policy, pays the premiums, and is entitled to the full policy benefits when the insured eventually dies.
The criterion required for one to have such a settlement is when someone has been diagnosed with severe medical conditions that render them terminally or chronically ill. And whereas life insurance doesn’t cover everything for terminally ill patients, life insurance does offer a variety of options that can ease financial problems. And a viatical settlement is one of those options.
That said, viatical settlement offers more advantages compared to other options as the seller gets more money (more than the surrender value) to cover immediate medical expenses. But the drawback is that beneficiaries do not receive anything once the seller dies. In this post, we shall explore how to financially protect your family via viatical selling options. Read on to find out which option outweighs the other.
Viatical options other than selling your life insurance
The main options you should consider before getting rid of your policy are:
- Accelerated death benefits (ADB).
- Policy cash value.
- Surrender value
If your policy has an investment feature or is a whole life policy, then you might decide to get a loan off of it to offset your immediate medical expenses. This will not only keep your policy intact, but you will pay off your medical bills and ensure your beneficiaries receive the benefits. But if up to this point your feel that life settlement is the way to go, you can reach out to settlement brokerages to scour the market and find on your behalf the highest cash value to settle for. And while it may less lucrative than the viatical settlement, you will have more cash for immediate health-related expenses.
- Accelerated Death benefit option
This option adds a rider to your insurance policy. With the ADB, you will keep your policy, but the insurance company will pay off a portion of the death benefit while the policyholder is still alive. And unlike what we see with a policy loan, the policyholder who accesses their ADB does not have to repay anything. The insurance company subtracts it from the death benefit.
- Policy loans option
This is the second option you might want to consider and still keep your insurance policy. It involves borrowing against your policy’s cash value. But as with regular loans, there are interest fees, which is the only drawback. Also, it is unlike other loans as the application process is swift because it is void of underwriting. And similar to the ADB, the amount is subtracted from the death benefit.
- Cash surrender option
With this option, policyholders can access their surrender value on the life insurance by simply canceling the policy. But the drawback is that the policyholders do not get the full amount because surrendering a plan is associated with fees. Most people are inclined to use this option to obtain money from their policies, but it is not as lucrative as a viatical settlement.
- Insurance policy settlement
This option involves individuals who aren’t eligible for a viatical as a result of having a life expectancy of more than two years. Nonetheless, you can still file for a settlement.
Reasons why you should pursue a viatical settlement
More often than not, people opt for viatical settlements because they need money to cover medical and end-of-life bills. But whatever the case may be, this decision shouldn’t be made hastily as there are other options to take advantage of. But the following situations are the biggest culprits that trigger people to seek viatical settlements:
- When you can no longer afford your insurance premium.
- If your beneficiaries no longer need the death benefit.
- If your term policy is almost expiring.
- Or if you want to improve the quality of your life.
Viatical settlements takeaway:
- Viatical settlements are designed to cater to those who are terminally or chronically ill.
- They offer more financial settlement than the traditional life insurance settlement.
- Viatical settlements are taxed differently from a traditional life settlement.
The process involved in selling your life insurance isn’t a clear-cut as a 1-2-3. Cases differ depending on one’s circumstances and the family situation. This means that if you are contemplating selling your life insurance, there are many factors to consider, as well as the options to choose from. But whichever route you go, the most common option always entails selling the policy for a value more than its cash surrender value. Alternatively, you can access its accelerated death benefits or the policy loan to help you offset your bills, and yet have your family receive the benefits.
