Viatical Settlements and Paying for Long Term Care

Page Reviewed / Updated - Jan. 2014

Definition: Viatical Settlements

A viatical settlement is the sale, by the policyholder, of their life insurance to a 3rd party in exchange for a lump sum of cash. The buyer pays the policy holder a lump sum and then takes over monthly premiums payments and collects the death benefit when the original policyholder passes away.

Viatical settlements are designed for the terminally ill with a life expectancy of less than 5 yrs. This is similar to a life settlement except in that life settlements are designed for individuals with life expectancies of up to 15 years.

 

Pros & Cons of Viatical Settlements

Life insurance policies can present a vexing problem for the elderly with limited life expectancies and high care costs.  Policies over a certain value (approximately $2,000) are considered by Medicaid to be  countable assets and therefore holders of policies cannot be eligible for care and financial assistance from Medicaid.  However because they remain living, they cannot collect the death benefit from their life insurance policy.  This is where viatical settlements provide a solution.  By selling the death benefit in advance of their passing, the policyholder can collect a fairly large percentage of the death benefit, which they can use to pay for care and they are freed from having to continue making monthly premium payments to keep the policy active.

Their alternatives are 1) allow the policy to lapse and hope they qualify for Medicaid or 2) accept the cash surrender value of the policy, which is considerably less than they would collect in a viatical settlement.

A further benefit is that the proceeds from a viatical settlement can be used for any purpose the policyholder chooses.  They can pay for residential care or make home modifications to allow them to age in their home or they can use the proceeds for another purpose entirely unrelated to care.

While there are many positives to a viatical settlement, there are also some drawbacks of which potential candidates should be aware.  Importantly, generating a lump sum of cash, as happens in a viatical settlement, may change the financial status of the individual thereby disqualifying them for Supplemental Social Security and other assistance programs.  Of course, the largest drawback which affects family members more than the policyholder, is that they will not receive the death benefit when the individual passes.

 Viatical Settlements vs. Life Settlements
The main difference between life and viatical settlements is the life expectancy of the policy holder. Shorter expectancies, under 5 years are considered viatical while longer expectations as much as 15 years are considered life settlements.  Viatical settlements are for the terminally ill while life settlements are designed for the senior who no longer requires their policy.  Also viatical settlements are usually tax exempt while life settlement gains are treated as income or capital gains.

Viatical Settlements vs. Accelerated Death Benefits
Accelerated death benefits (ADB) come from the insurance company not from a sale of the policy to a 3rd party. With ADB, the policyholder continues to make premium payments while with a viatical settlement, the policy buyer takes over those payments. 

 

Eligibility Requirements

Each purchaser of life insurance or “viatical firm” has its own qualifications.  What follows are general eligibility requirements. 

Individual Qualifications

 Most viatical settlements involve policyholders with life expectancies of between 2 -5 years.

The usual qualifying criteria for elder care assistance, one's age, their marital and veteran status or their geographic location plays no role in eligibility for viatical settlements.  Instead, the only real individual factor is the life expectancy of the policyholder.  Most viatical companies require that the insured be terminally ill with a defined life expectancy of less than 5 years or in some exceptional cases 7 years.

Companies require complete medical records and a medical exam for the insured where a doctor certifies their life expectancy.

 

Policy Qualifications

All types of life insurance qualify for viatical settlements, but not all buyers will automatically purchase all policies.  Nearly every company requires that the policy be in place for at least 2 years. Most companies require a policy face value of over $50,000.

 Did You Know?
Life insurance policies can also be traded for care services.  This solution has two advantages.  Policyholders receive a higher value (in care services) for their policy than they would in a viatical settlement and they preserve their eligibility for Medicaid should it become necessary.  Learn more.

 

Benefit Details and Amounts
  • Viatical settlements usually net the policyholder between 60% - 90% of the policy's face value.
  • Viatical settlements are paid out in a single lump sum. Payouts are sometimes referred to as “living benefits”.  Most settlements are tax-exempt if a licensed broker is used and the policy holder meets the regulatory definition of terminal illness.  There are no restrictions on how the proceeds from a viatical settlement can be used.   Although it is worth mentioning that occasionally if the recipient has other debts, creditors may attempt to claim the settlement.
  • Viatical settlement amounts depend on the projected life expectancy of the policy holder as well as the face value of the policy. These range from less than 60% of the death benefit if the policy holder has more than 2 years to live to as much as 90% if they have just a few months.
  • Viatical settlements are usually paid out within 6-12 weeks after the insured begins the sales process. Waiting for doctors to provide medical information is usually the largest holdup in the process.

 

Associated Costs with Viatical Settlements

Insurance companies do not charge a policyholder to sell their policy and receive a viatical settlement. However, many policy sellers will use the service of a broker to get them the best possible payout for their policy. Brokers do provide a valuable service and their efforts can pay for themselves. That said, seniors should be selective if and when they choose a viatical settlement broker.

The laws regarding broker fees change by state. Some brokers claim they do not charge their clients a fee, however in reality, the client receives a lowered offer price and the buyer pays the broker.  Most brokers use one of the following the models for their fees.

1. Percentage of the policy’s face value.
2. Percentage of the settlement amount
3. Percentage of settlement amount minus the cash surrender value.

The table below provides examples of each. It is important to note that while the percentages can be negotiated so that the fees for each model are about the same but the 3rd model most closely aligns the interest of the broker with that of the policy holder. Therefore a senior can be confident that the broker is working in their best interests. Settlements are tax-exempt if a licensed broker is used and the policy holder meets the regulatory definition of terminal illness.

Broker’s Fee Model

Face Value
of Policy

Cash Surrender Value

Viatical Settlement Amount

Broker’s
Fees
Structure

Broker’s
Fee Amount

Policy
Holder’s
Amount

1) % of Face Value

$500,000

$50,000

$150,000

6% of Face Value

$30,000

$120,000

2) % of Settlement Amount

$500,000

$50,000

$150,000

25% of Settlement

$37,500

$112,500

3) % of Settlement - CSV

$500,000

$50,000

$150,000

35% of Settlement minus the Cash Surrender Value

$35,000

$115,000

 

 

How to Apply for a Viatical Settlement or Determine Policy's Value

Most people interested in viatical settlements will use the service of a broker. Brokers provide 3 major advantages.


1)They manage the process.


2) They can generate higher settlement amounts for the sellers.  By taking the policy to multiple buyers and they receive multiple competing bids and because they have direct relationships with the buyers, they often receive higher bids than the buyer would give directly to an individual trying to sell a policy.


3) Settlements are tax-exempt if a licensed broker is used and the policy holder meets the regulatory definition of terminal illness.

It is generally accepted that using a broker pays for itself, but there are opposing views. Without question, brokers make the process considerably easier and for that reason alone they are recommended. Initiating a conversation with a broker is highly informational, free of charge and puts an individual under no obligation.

To learn more, determine an approximate settlement value or to be connected with a Viatical Settlement broker, please complete the form below.

 

First and Last Name(*)
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Age of the policyholder(*)
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Face value of the policy(*)
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