One of the many questions that financial advisors often get about selling one’s life insurance has to do with the difference between viatical settlements and life settlements.
There’s a lot of confusion about these two transactions. To help clear up that confusion, here’s a brief explanation of viatical vs. life settlements.
Just like a life settlement, a viatical settlement involves a life insurance policyholder selling their life insurance to institutional investors, who then assume all premium payments and become the beneficiaries of the policy. The policyholder receives a lump sum payment for the policy, which is greater than the policy’s cash surrender value.
The key difference with viatical settlements has to do with the insured’s life expectancy. Viatical settlements are available to people who are terminally ill and whose life expectancy is 2 years or less.
Typically, the primary reason for transacting a viatical settlement is to access cash from the policy in order to pay for ongoing care or other medical expenses. If the funds are used for qualified long-term care, the money received is generally tax-free; however, it is important to discuss the tax implications with a qualified tax professional to determine whether the funds you receive will be subject to federal income tax. Viatical settlements can be extremely helpful to patients and their families dealing with the extraordinary costs of care for terminal illness.
Although the transaction - selling one’s life insurance policy to a third party - is the same, a life settlement can be undertaken by any policyholder – even if the insured’s life expectancy is longer than 2 years. Still, those that qualify for a life settlement are typically seniors with reduced life expectancy due to health impairments.
A life settlement can be used for all kinds of reasons: financing another policy, padding a retirement fund, paying for long-term care, even taking a trip around the world. The lump sum payment that the policyholder receives is theirs to spend as they see fit.
While there are a very clear set of circumstances that would lead a financial advisor to suggest that a client explore a viatical settlement, there are many different reasons a life settlement could be the right choice.
The most important criteria, of course, is that the client’s current policy no longer fits their objectives. That might mean a few things:
- The premiums could have become unaffordable.
- The family members whom the client bought the policy to protect could be self-sufficient, and no longer in need of financial protection.
- The client and their family might be experiencing significant financial stress due to healthcare costs, and accessing some of the policy’s value may be of more use today than receiving the full death benefit.
Another reason is if the policy is an older one, or was implemented as part of a pre-EGTRRA estate planning solution. In these cases, a financial advisor might recommend reviewing the policies to see if they’re still fulfilling the client’s needs. If they are, nothing needs to be done. If not, a life settlement may be a good option to explore.
Life settlements and viatical settlements involve the same basic transaction, but the criteria surrounding them are very different. Take Ashar’s Policy Value Quiz to determine if a life settlement is an option for your client.