Page Reviewed / Updated - Jun. 2018
A viatical settlement is the sale, by the policyholder, of their life insurance policy to a third party in exchange for a lump sum of cash. The buyer pays the policyholder a lump sum and then takes over monthly premium payments and collects the death benefit when the original policyholder passes away.
Viatical settlements are designed for the terminally / chronically ill with a life expectancy of (generally) less than two years. This is similar to a life settlement except for the expected duration of time the policy seller is expected to live. Life settlements are designed for individuals with life expectancies of up to 15 or 20 years instead of those with shorter life expectancies due to terminal illnesses.
Life insurance policies can present a vexing problem for the elderly with limited life expectancies and high care costs. An insurance policy with a face value (death benefit) over $1,500 is considered by Medicaid to be a "countable asset". For instance, if an individual has an insurance policy with a face value of $2,000 and the cash surrender value (the amount the insurance company will pay out to the policyholder prior to the policy maturing) is $800, the cash surrender value is a countable asset towards the $2,000 asset limit that is set to determine Medicaid eligibility. Make note, it is only the cash surrender value that is counted as an asset.
Therefore, holders of policies may not be eligible for care and financial assistance from Medicaid, depending on their life insurance policy. However, because they remain living, they cannot collect the death benefit from their life insurance policy, which is greater than the cash surrender value. 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 their death benefit, which will be greater than the cash surrender value, and they can use it to pay for care. This also frees them 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 in-home personal care assistance, residential care, make home modifications that enable them to age in their homes, 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, Medicaid, and other assistance programs. Of course, the largest drawback, which affects family members rather than the policyholder, is that they will not receive the death benefit when the individual passes.
Each purchaser of life insurance or “viatical firm” has its own qualifications. What follows are general eligibility requirements, both of the policy holder and of their policy.
The usual qualifying criteria for elder care assistance; age, marital status, income, and 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 four years, or in some exceptional cases, seven years.
Companies require complete medical records and a medical exam for the insured in which a doctor certifies their life expectancy.
All types of life insurance policies 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 two years. Most companies require a policy face value of over $50,000.
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 vary 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 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 model. It is important to note that while the percentages can be negotiated so that the fees for each model are about the same, the third model most closely aligns the interest of the broker with that of the policyholder. Therefore, a senior can be confident that the broker is working in their best interest. Settlements are tax-exempt if a licensed broker is used and the policyholder meets the regulatory definition of terminal illness.
Viatical Settlement Brokers' Fees
Broker’s Fee Method
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
Most people interested in viatical settlements will use the service of a broker. Brokers provide three major advantages.
1)They manage the entire process.
2) They can generate higher settlement amounts for the sellers. By taking the policy to multiple buyers, 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 policyholder 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.