If your chances of survival are slim and you own a life insurance policy, you may want to consider obtaining a viatical settlement. With a viatical settlement, an investor purchases your life insurance policy for a price that is less than the death benefit. You irrevocably assign your life insurance policy to them and they take over responsibility for the annual premiums. If you die, they collect the death benefit.
The amount of a viatical settlement depends on the type of cancer, a review of your medical records, and your prognosis. It also depends on the type of life insurance policy, the amount of the death benefit, and the amount of any cash value associated with the policy.
The primary benefit of a viatical settlement is it gets you money that you can use now. The money can help pay for your treatment or make you more comfortable. Viatical settlements are particularly useful to people who no longer have any beneficiaries.
There are, however, several drawbacks to viatical settlements.
- The purchaser of the viatical settlement is banking on your death. The sooner you die, the greater the return on their investment.
- The amount of the viatical settlement will be less than the death benefit on your policy, sometimes substantially less. Do not accept any offer that is less than two-thirds of the face value of the policy.
- Your life insurance policy will no longer be available to help your family with living expenses after your death.
- The proceeds of a viatical settlement may be subject to estate taxes, even if the death benefit from the original life insurance policy was not.
- There may be significant tax consequences to you for accepting a viatical settlement, especially if your condition is not considered chronic or terminal. Proceeds from a viatical settlement are only exempt from federal income tax when your life expectancy is less than two years and the viatical settlement company is licensed by the state. Not all states exempt viatical settlements from state income tax, and the requirements vary from state to state.
- A viatical settlement may affect your eligibility for public assistance programs such as Medicare and Medicaid.
- Seeking a viatical settlement may invade your privacy, since you will need to release your medical records to the viatical settlement company.
In addition, there are many companies that try to take advantage of elderly patients with sizable life insurance policies. Many states require viatical settlement companies and brokers to be licensed by the state, so you should check with your state insurance regulator. The viatical settlement company must be licensed by your state for the settlement to be tax-exempt. Avoid doing business with any company that uses high pressure sales tactics.
You may find it helpful to talk with your life insurance company. Some insurance policies include an accelerated death benefit clause that is similar in nature to a viatical settlement. An accelerated death benefit pays part of the death benefit in advance, with the rest being paid at death to the original beneficiary after deducting a small fee (typically 3% to 4%). Another alternative is to get a loan from the beneficiary of the insurance policy or borrw the cash value of the life insurance policy.
Get offers from several viatical settlement companies to be sure you're getting as much money as possible. You should compare all offers based on how much money you will net from the settlement after taking the tax consequences into account.
Employer group life insurance policies can be converted to permanent life insurance within 31 days of separation from the employer, often without requiring a medical exam. This policy can then be sold, yielding additional support for the cancer patient and their family.
It is a good idea to have an attorney review the offers. The attorney can inform you about possible estate tax considerations. The attorney can also help protect you from scams where the 'purchaser' doesn't actually have any money to pay for the policy, but instead will try to sell the policy to a third party.
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