Pros and Cons of Viatical Settlements
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UPDATED: Aug 13, 2020
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If you or a loved one is terminally ill, you may need money now for care, medical bills or perhaps to live a quality of life before the end. Viatical settlement companies are firms that will buy your life insurance policy if you or your love one is terminally ill. They then will become the effective owners and beneficiaries and receive the life insurance payout when the insured dies. The viatical company’s hope is to price the settlement at a price that will be attractive to the insured and also allow the viatical company to make a profit.
If you are terminally ill with a life insurance policy, you’ll be offered only a fraction of the face value of your life insurance policy to sell it, but you’ll get that fraction NOW rather than have your beneficiaries get the face value after your death. The buyer of the policy will cover all its costs and risks (i.e. the insured might live much longer than expected) until the insured person eventually dies and the buyer collects the full death claim value.
TIP: A company purchasing a life insurance policy is essentially betting that the insured will die before the policy lapses or becomes unprofitable for the company to own due to the premium payments it must maintain. While this is an unpleasant thought, the benefit of immediate cash to enjoy during the end of life is not.
How Viatical Settlements Work
To be eligible for a viatical settlement, the patient needs to have life insurance and be considered terminally ill. The percentage of that overall value of your life insurance policy you will receive (the viatical settlement amount) is determined by actuaries who calculate what they are willing to pay for your life insurance policy and yet make a large enough profit after paying you as well as continue paying premiums for some indefinite period until the insured dies. This process essentially projects when the insured will pass, calculates how much it will cost to own the policy until then, and assigns a value that makes sure the company purchasing the policy makes money. The viator, or the insured, signs a form to make an absolute assignment of the policy which means all ownership rights are transferred to the buyer. The form is sent to the insurance company which will notify you and the buyer when the assignment has been completed.
Calculating the Viatical Sale Price
The price a policy owner receives is based a combination of factors:
- The face amount of the policy. Life insurance policies with greater face amount will get a larger viatical settlement.
- The anticipated life expectancy of the insured person. The shorter the anticipated longevity, the higher the price you are likely to receive when selling your life insurance policy. Using actuarial and medical data, professionals at the broker or life settlement company estimate the life expectancy of the person whose life is insured. Life expectancy is estimated based on the following factors:
- The age of the insured. An average 65 year old has a much longer life expectancy than the average 85-year old. The older you are, the higher the price you are likely to receive.
- The health and medical condition of the insured. Some conditions (such as pancreatic cancer) normally lead to death within a very short period of time (although there are rare exceptions). Some conditions (such as certain heart conditions and cancers) are known to generally result in death over a period of 2-6 years. Yet other conditions (such as diabetes, extreme high blood pressure) are known to shorten average life expectancy considerably but with far greater variability.
- Prospects for cures. Discovery of the AIDS cocktail dramatically changed the life expectancy of those with AIDS and HIV infections. The more likely it is that a cure for the insured’s medical condition, as a result of new medicines or surgical procedures, or that the insured will engage in dramatic changes in lifestyle – such as exercise and lose 200 pounds -impacts the risk the buyer prices for.
- The sex of the insured. As women live longer than men on average, a male is likely to receive more for a policy than a woman of the same age with identical medical conditions.
- The estimated cost of keeping the policy in force until the anticipated date of death. That in turn depends on:
- The expected annual premium for the policy, assuming the policy is not “paid-up.” The higher the future premium, the lower you’ll likely be paid.
- The amount of cash value in the policy, and the rate of interest that is guaranteed or projected to be credited on cash values.
- The guarantees in the policy, such as whether the premium and amount of coverage is guaranteed or subject to change.
- Other Costs, to cover all the parties involved. This includes the life insurance agent who may have approached you and suggested you consider selling the policy, the regional life settlement firm that may have trained the agent or handles the paperwork on your end, the national wholesaler that conducts the underwriting and medical evaluations and then packages the policies and matches selling policyholders with the investors who provide the cash to buy the policy.
- The prevailing interest rates and anticipated changes in the economy. If general interest rates are low, the rate of return the buyers will demand is likely to be lower than if the rates are high.
The Terms of Your Insurance Policy
Once all these factors have been reviewed and your individual circumstance are taken into consideration (your health, your life expectancy) viatical settlement companies will then consider the actual terms of your life insurance policy. These terms differ depending on whether you policy is a whole life, universal life or term life. Here are some factors that may be considered:
- Whether the policy will or could expire by its own terms at any point in time even if premium is paid. For example, term life insurance policies will lapse. If the policy lapses before the insured dies, the company purchasing it will lose money, so the offered price will likely be lower.
- Policies sponsored by an employer, association or other group often permit the group or insurance carrier to terminate the plan or reduce the amount of coverage or change premium rates for all persons covered. That may leave policyholders stranded, and lower the offer price or prevent a sale from happening all together.
- Waiver of premium provisions — a policy that contains a waiver of premium provision (allowing the insurance company to pay the premiums if the owner becomes disabled) is worth more than the same policy without such a provision. The definition of disability often varies from policy to policy and company to company.
- The age at which the policy matures or endows, such as age 90 or 95 or 100, so that benefits would be paid even if the insured is still alive.
- The existence of an accidental death benefit will pay more than if there is no provision for this.
- The financial strength and stability of the insurance company that issued the policy. Unless the insurance company has strong financial ratings, the potential buyer of a life settlement would pay less or decline to bid.
Based on this information, the prospective buyer determines how much it is willing to pay the insured for the policy. Not all prospective buyers or life insurance viatical settlement companies come to the same conclusion. This creates variations in the settlement amount. Make sure you consult a viatical life insurance attorney before entering into a viatical agreement. Contact an attorney to review the terms of your viatical settlement to make sure you are being treated fairly. This also holds true if you are buying a viatical settlement. A lawyer well trained in these settlements can ensure that your settlement is fair and the terms are equitable for both sides.
Things to Consider
Before you sign your viatical contract make sure you think through the point below. Then contact a viatical attorney who can further advise you of your options.
- The implications to the original beneficiary or beneficiaries. Was the insurance intended to protect the beneficiary against financial loss when the insured dies? What will happen to the beneficiary if a viatical settlement is reached, and then there will be no proceeds available when the insured dies?
- Who will pay any debts or medical expenses after death in the absence of life insurance proceeds?
- What if the insured recovers or a cure is found for the insured’s condition? – Your life insurance is gone and you probably will be uninsurable.
- What if the insured dies more quickly than expected? Would it have been better to refuse the viatical settlement and allow the beneficiary to get the full value of the policy?
TIP: Before signing, there are things you should consider. Making an informed decision about your viatical settlement is the best way to make sure it is the right decision for you and your family. Consult with an attorney who can tell you if you are getting a fair deal!
Can You Change Your Mind in a Viatical Settlement?
Before you enter into any agreement, you should be absolutely sure this is what you want, however, if you or the potential viator has a change of mind before the contract is finalized, you can simply stop the process. Further, after a contract has been finalized and the viator has received the funds, he or she can cancel the agreement in most states within a stipulated time period (often 15 days or 30 days). To cancel, the viator returns the money by sending a bank check to the viatical company. The check should be sent by certified mail (with return receipt). The receipt will provide confirmation that the company received it in the time frame to cancel.
Although these settlements can provide the needed monetary benefit during the end of life, it can not be stressed enough that having a qualified attorney review your viatical settlement contract prior to signing is the best way to ensure that you are getting the most equitable deal for your life policy. You can bet the group purchasing the policy will have an attorney, so it is a good idea for you to have one as well. Click here to use the Free Advice legal center to contact a an estate planning attorney in your area. Consultations are free, and having legal advice to help you with your end of life planning can be invaluable.
Read more articles about life insurance beneficiaries by clicking here.