What is Viatical Settlement?

A viatical settlement is an arrangement in which someone with a terminal disease sells his or her life insurance policy at a discount from its face value for ready cash. The buyer cashes in the full amount of the policy when the original owner dies. A viatical settlement is also referred to as a life settlement.

How a Viatical Settlement Works

A viatical settlement is extremely risky. The rate of return is unknown because it's impossible to know when someone will die. If you invest in a viatical settlement, you are speculating on death. Therefore, the longer the life expectancy, the cheaper the policy. However, because of the time value of money, the longer the person lives, the lower your return. This is undoubtedly one of the more morbid investments someone can buy.

Key Takeways A viatical settlement occurs when a policy owner has a terminal disease and sells their policy for cash.

The buyer of the policy (from the seller) cashes in the full amount of the policy when the original owner dies.

Another name for a viatical settlement is a life settlement.

There may be tax implications for a viatical settlement.

Individuals not facing a health crisis may also choose to sell their life insurance policies to get cash in a viatical settlement. If a life insurance policyholder is considering this option, they should first consider all available options for obtaining the needed cash. There might be a better way to utilize a life insurance policy.

A viatical settlement is extremely risky because if you invest in a viatical settlement, you are speculating on death.

For instance, a life insurance policyholder may be able to access some of the cash value to meet their immediate needs while keeping the policy in force for beneficiaries. It might also be possible to use the cash value as security for a loan from a financial institution.

An accelerated death benefit is also an option. An accelerated death benefit usually pays some of a policy’s death benefit before the insured dies. This could provide the needed cash without selling the policy to a third party.

Points to Consider About Viatical Settlements