Viatical Settlements and Life Insurance

Most people on the street have no idea what a viatical settlement is and in our opinion, hopefully they never will. Somewhere between CDO's and reverse mortgages, the sophisticated financial world of viatical settlements and life insurance exist. Let's take a look at what they are and how they work.

The first thing to understand is that you can think of term life insurance as an asset but one that isn't vested yet. This means it will be an asset in the future...at the time of payout. This assumes that you keep the policy in effect by paying the premium of the policy according to the requirements of the life insurance company. The trigger that creates the asset unfortunately is the death of the insured. Now that we have a good grasp at the "value" or asset qualify of a term life insurance policy, let's look at viatical settlements.

It may sound morbid but the essence of a viatical settlement is usually that the policy owner (which is usually the insured as well) has been diagnosed with a fatal disease. In light of this, the life insurance policy owner can opt to sell the policy "proceeds" for life benefit in advance to a third party. There are many twists and turns to the whole process as the viatical settlement is a separate contract in itself but the above description is the core instrument. Why would a person enter into such an agreement and what's the downside if any?

There are many reasons the person may sell his/her life insurance "asset" to a third party. They may need the funds now to pay for medical bills associated with their illness. The needs may have changed to where the traditional income replacement need of life insurance is no longer needed. The owner may want to use the money while still alive...again, keep in mind that viatical settlements are almost always tied to a person who has a short life expectancy. There are also many people who have life insurance policies through employers but do not have dependents such as spouses and/or children. A viatical settlement might make sense in this regard. So what is the downside?

The person who sells their life insurance policy will not get the full face value. In fact, the policy can be sold at a pretty steep discount depending on the situation. There's an entire secondary market for life insurance policies via viatical settlements. Essentially the people that purchase the life insurance policy on the other side of the transaction are typically investors. There are usually salespeople or brokers that take commission to bring these sides together. On one hand, this market is needed to provide both buyers and sellers of life insurance policies but it also is a cost and that means the person selling the life insurance policy receives less. Maybe it's a necessary evil but it's still downside to the entire transaction.

Our focus is on the benefits of term life insurance in its traditional aims such as income replacement over a long period of time. Viatical settlements are not our focus but as with all thing life insurance, we want our customers and visitors to have a well-rounded base of information including the strange world of term life insurance and viatical contracts.