Viatical Settlements and Paying for Long Term Care
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 very similar to a life settlement; however those are designed for individuals with life expectancies of up to 15 years.
It is common for terminally ill seniors with life insurance policies to use viatical settlements to help pay for the cost of their long term care. By selling the policy to a 3rd party, the policy holder gets a lump sum settlement that is higher than the cash surrender value of the policy. They can use the settlement for any purpose they choose.
Each purchaser of life insurance or “viatical firm” has its own qualifications. Some require a life expectancy of less than 2 years and others, though exceptional, of as long as 7 years. Typically the buyer requires the seller to have a medical exam and a doctor must certify their life expectancy.
Most viatical settlements involve the use of a viatical settlement broker who shops the policy around to multiple buyers and charges a fee. It is possible for a seller to manage their own sale, but brokers often get a higher price for the policy than an individual seller and therefore can justify their fees. There are viatical buyers for all different types of life insurance. Usually, the policy must be at least two years old and have a face value of $50,000, but exceptions do exist.
Viatical settlements are often confused with life settlements. The main difference 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. A second major difference is how the proceeds are taxed. Viatical settlements are usually tax exempt while life settlement gains are treated as income.
There is also confusion regarding accelerated death benefits (ADB). ADB settlements come from the insurance company not from a sale of the policy to a 3rd party. With an ADB, the policyholder continues to make premium payments while with a viatical settlement, the policy buyer takes over those payments.
Be Aware That:
-To be eligible for a viatical settlement the policy holder must have a medically certified, life expectancy of less than 5 years.
-Generating a lump sum of cash through a viatical settlement may change the financial status of a senior and disqualify them for Medicaid or Supplemental Social Security.
-The proceeds from a viatical settlement are not subject to taxation, a key difference from life settlements.
Viatical Settlements are Also Known As:
-Inaccurately referred to as Life Settlements
Qualifications for Viatical Settlements
Each viatical settlement buyer has their own qualifications. The information below is typical of but be aware that exceptions exist.
There are no age requirements to be eligible for a viatical settlement.
Disabilities / Health Requirements
Viatical settlement companies require that the insured be terminally ill with a defined life expectancy of less than 5 yrs. For some buyers the life expectancy can range from 2-7 years. Most companies require complete medical records and a medical exam for the insured where a doctor certifies their life expectancy.
Marital or family status is not usually considered by the buyer when making viatical decisions. Note that anyone listed as a beneficiary on the policy may be asked to sign a release.
Financial Status Requirements
The financial status of the insured is not a factor in viatical settlement decisions.
Veteran Status Requirements
The insured’s veteran status is not a factor in viatical settlement decisions.
The geographic location of the insured is not a factor in viatical settlement decisions.
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 but non-traditional buyers do exist for policies as low as $20,000.
Benefits of Viatical Settlements
Types of Benefit Payout
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.
Restrictions on How the Proceeds Can be Used
There are no restrictions on how the proceeds from a viatical settlement can be used. On occasion, if the recipient has other debts, creditors may attempt to claim the settlement.
Benefits Amounts & Limits
Viatical settlement amounts depend on the projected life expectancy of the policy holder as well as the face value. 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.
Time to Receive Benefits
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.
This Source Can Help For
Any purpose the policyholder or their family choose including:
-Adult day care
-Assisted living / senior living
-Skilled nursing home care
-Alzheimer's / dementia care
Costs of 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.
There are 3 models for broker’s fees. Brokers will take either:
- A percentage (maybe 6%) of the policy’s face value.
- A percentage (maybe 25%) of the life settlement amount
- A percentage (maybe 35%) of life 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
Cash Surrender Value
Viatical Settlement Amount
1) % of Face Value
6% of Face Value
2) % of Settlement Amount
25% of Settlement
3) % of Settlement - CSV
35% of Settlement minus the Cash Surrender Value
How to Apply for a Viatical Settlement
Most people interested in viatical settlements will use the service of a broker. Brokers provide 3 major advantages. They facilitate the process, they take the offer to multiple buyers and therefore receive multiple competing bids and finally 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.
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.
Page Reviewed / Updated - Mar. 2013