Definition
A viatical settlement is a financial arrangement where an individual diagnosed with a terminal or chronic illness sells their life insurance policy for a lump sum payment that is less than the policy’s face value. In this scenario, the purchaser takes over the policy, pays the remaining premiums, and receives the full death benefit once the original owner passes away. It’s like cashing in your chips at the casino of life— a bit risky but could pay off in the end!
Viatical Settlement vs Life Settlement
| Feature | Viatical Settlement | Life Settlement |
|---|---|---|
| Insured’s Life Expectancy | Two years or less | Greater than two years |
| Cash Payment | One-time lump sum | Also typically a lump sum |
| Responsibility for Premiums | Buyer pays future premiums | Buyer pays future premiums |
| Policy Type | Life insurance | Life insurance |
| Investor’s Benefit | Full policy amount at death | Full policy amount at death |
Examples
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Viatical Settlement Example: John has a life insurance policy with a face value of $100,000. Facing terminal illness, he secures a viatical settlement, selling his policy for $40,000. The buyer assumes responsibility for premiums and collects $100,000 upon John’s passing, while John gets immediate cash to fund his needs.
-
Related Term - Life Settlement: Similar to viatical settlements but intended for those with a life expectancy longer than two years, a life settlement allows policyholders to sell their policies often for higher prices than those typical of viatical policies, albeit with less urgency for cash.
Formulaic Fun
In a viatical settlement, the effective return on investment for the purchaser can be loosely quantified by this formula:
graph TD;
A[Investment] -->|Initial Cash Payment| B[Return] --> C[Face Value]
C -->|Death of the Insured| D[Net Gain] --> E[Total Investment]
D = C - B
Where:
- B = Cash payout made to the policy seller.
- C = Cash received upon the insured’s death (policy face value).
- D = Potential gain realized upon the policy’s payout.
Humorous Insights
“Investing in viatical settlements is for those who think that timing the market is as easy as timing when to take grandma’s chess piece!” 😂
Fun Fact: Viatical settlements gained popularity in the 1990s amid the AIDS crisis when individuals sought ways to monetize their life insurance policies quickly amid terminal illness.
Frequently Asked Questions
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What types of policies can be settled viatically?
Most life insurance policies can be a candidate— term, whole life, universal life— the key is the insured’s short life expectancy. -
Are viatical settlements regulated?
Yes, they fall under state insurance regulations, which vary widely. -
How can I find a buyer for a viatical settlement?
Many companies and brokers specialize in purchasing viatical settlements. Just make sure they are reputable—like keeping your poker players honest, baby! -
What’s the typical discount on a viatical settlement?
This can vary widely, but recipients generally get between 20% to 80% of their policy’s value. -
Can I get a viatical settlement without a terminal diagnosis?
Unfortunately, no. It’s essential to have a document from a licensed physician indicating a life expectancy of two years or less.
Further Resources
- Viatical Settlement Association
- “The Viatical Settlement Market: A Guide for Consumers” - Insurance Institute Publication
- “Life Settlements and Viatical Settlements: Understanding the Basics”, available in select libraries.
Test Your Knowledge: Viatical Settlement Challenge
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