Viatical Settlement: What It Is and How It Works

Overview

A viatical settlement is an arrangement in which an owner of a life insurance policy who is terminally or chronically ill sells the policy to an investor for a lump-sum cash payment that is less than the policy’s death benefit. The buyer pays any remaining premiums, becomes the policy’s beneficiary, and receives the full death benefit when the insured dies. Viatical settlements are typically used when the insured has a life expectancy of roughly two years or less.

How It Works

• Seller (policy owner) transfers ownership and naming of beneficiary to the buyer in exchange for a one-time cash payout.
• Buyer pays future premiums to keep the policy in force and collects the death benefit when the insured dies.
• The investor’s return depends on timing: a shorter-than-expected life span increases the investor’s return; a longer lifespan reduces it because of the time value of money and ongoing premium costs.

Why People Use Viatical Settlements

• Obtain immediate cash to pay for medical care, living expenses, or other needs.
• Preserve other assets (for example, avoid selling a home) while funding current needs.
• Access funds without incurring new debt.

How Viatical Settlements Differ from Life Settlements

• Viatical settlement: typically for insureds with a life expectancy of two years or less.
• Life settlement: for insureds with longer life expectancies who wish to sell a policy for cash for reasons other than terminal illness.
• Alternatives to selling include accessing policy cash value, taking a policy loan, or using an accelerated death benefit (which advances part of the death benefit under qualifying conditions).

Risks and Criticisms

• Investment uncertainty: investors are speculating on life expectancy, so returns are unpredictable.
• Potentially lower proceeds for the seller than other options (loans or policy surrender).
• Privacy and medical oversight: buyers may request periodic health updates on the insured.
• Possible claims from creditors or impacts on eligibility for public assistance programs if proceeds are not handled properly.

Regulation and Consumer Protections

• Many states require companies that broker or buy viatical settlements to be licensed and regulated by the state insurance commissioner.
• Consumers should verify licensing and consider contacting their state insurance department or the National Association of Insurance Commissioners (NAIC) for information about state rules and consumer protections.

Practical Checklist Before Selling

• Get several offers to compare payout amounts and terms.
• Request an in-force illustration or reprojection for your current policy to understand current values.
• Review tax implications with a tax professional—proceeds may not be entirely tax-free.
• Check whether creditors, liens, or estate claims could affect the settlement proceeds.
• Consider how proceeds might impact eligibility for Medicaid, SNAP, or other public assistance.
• Confirm how and when the buyer may access medical information and make sure you are comfortable with that level of disclosure.
• Require that settlement funds be deposited into an independent escrow account during the transfer.
• Ask whether the contract allows any revocation or refund period in case of seller’s remorse.
• Answer all application and medical-history questions truthfully.

Conclusion

A viatical settlement can provide essential liquidity to someone with a short life expectancy, but it carries financial and privacy trade-offs and can be risky for investors. Explore alternatives, compare offers, understand legal, tax, and public-assistance consequences, and verify licensing and contract protections before proceeding.