What Is A Viatical Settlement?

A viatical settlement is the sale of a life insurance policy by the policy owner, before the policy matures. Such a sale provides the policy owner an immediate cash settlement. Generally, viatical settlements involve insured individuals with a life expectancy of less than 5 years. Life settlements, also called senior settlements, are similar to viatical settlements, but involve the sale of as life insurance policy when the owner has a shortened life expectancy, but the life expectancy is over 5 years.

In countries without state-subsidized healthcare and high healthcare costs such as the United States, this is a practical way to pay extremely high health care costs that severely ill people face. Often this is the only means of obtaining the funds necessary to pay for health care when afflicted with a fatal illness.

The Life Insurance Settlement Industry exists because it provides a unique financial service to policyholders in need. Simply put, viatical settlements allow policyholders to use their life insurance policy as a liquid financial asset. It is an invaluable service for those in need of financial assistance.

The amount of funds provided in a viatical settlement reflects the discounted future value of your life insurance proceeds. There are four important factors in the computation of a present value amount. These factors include the stated amount of the life insurance policy, the expected amount of time until collecting the life insurance proceeds as reflected in the insured's life expectancy estimate, the annual cost of maintaining premium payments, and a yearly rate of return (discount rate).

To further explain these four factors, let's assume you currently have a life insurance policy of $500,000, and that you have a type of inoperable cancer. Your life expectancy with this type of cancer is 3 years. A firm or investor will purchase your life insurance policy from you. The actual sale of your life insurance policy is a viatical settlement. However, you will not be able to sell your policy for the entire $500,000, as there are costs associated with the purchase that the investor will factor in.

The first factor is the policy amount. In our example, it is $500,000. That is the starting point for computation. The second factor is life expectancy. In this example, it is 3 years. The investor who purchases your life insurance policy will have to wait 3 years for the return of his money. Now, this 3 year period is simply a medical estimate. It may be less, it may be more. This is a risk that the investor assumes.

The third factor is the cost of the monthly or annual premium payments to keep the policy in force. The $500,000 policy is instantly worthless if allowed to expire. Whatever the monthly premium payment is will be factored into the present value.

Lastly is a rate of return for the investor. Obviously, the investor could earn interest on his money by simply putting his money in a savings account or certificate of deposit. To assume the risk, the investor will want a rate of return higher than other alternatives that carry less risk.

Once all of these factors are computed, the investor will determine a present value of the future payment of your life insurance policy, and offer to purchase it from you for this value. The present value will be different from one investor to another. Some may factor a higher margin of life expectancy, while others may want a higher rate of return. The best way to find the highest offer is the same way that you purchase a new car: shop around.

In the early days of viatical settlements, the industry was largely unregulated. There were some problems and abuses, but those have since vanished once government regulators became involved. Despite the previous bad experience of some investors, viatical settlements remain a valuable tool for the personal financial management of many ill people. A 2002 study showed that among hospice financial counselors who have had experience with viatical settlements, most report positive experiences.