Life Settlements and Viaticals

If you’ve watched late-night TV lately, you’ve noticed ads for life settlements – a way to Get Cash Now! for your life insurance policy. And you may have heard of viatical settlements, which promise the same thing. Are these offers legit, and what are the differences?

Both types of settlements involve selling an existing life insurance policy to a third party, which

• Becomes the owner of the policy.
• Takes over premium payments.
• Collects the death benefit when the insured person passes away.

In exchange, the original owner receives an amount somewhere between the policy’s cash value and what their beneficiaries would have received when they died.

You read that right: you can get paid for turning your life insurance over for someone else to pay. The concept has existed since the early 1900s, becoming especially important in the 1980s as the AIDS epidemic began to take its toll. Policyholders could sell their policies and use the cash to pay for medical treatment – often experimental and not covered by health insurance.

Those settlements were considered “viatical.” A viatical settlement is appropriate for someone who has been diagnosed with a terminal or chronic illness. A chronic illness is one that causes a person to be unable to perform at least two activities of daily living: bathing, dressing, toileting, etc.

“Terminal illness” is defined as having a condition from which a person is not expected to recover, with a life expectancy of two years or less. Think of how helpful a sum of money could be at a time when life has reached a turning point — to pay for treatment, upgrade care, take a trip, or make arrangements before passing.

Viaticals typically pay out 50%-70% of the policy’s death benefit, not including fees or commissions. Usually, proceeds from a viatical are not taxable; it’s an advance on what would have been paid tax-free to your beneficiaries. Check with a tax professional before signing a settlement contract to make sure.

If you find yourself considering a viatical, take a close read of your policy. Some include a provision for accelerated death benefits, a built-in viatical option that can avoid the costs of a third-party settlement.

Life settlements, conversely, do not require the insured person to be chronically or terminally ill. In fact, you could be healthy and simply not need life insurance anymore. If you

• Sell your business
• Have kids who need less of a bequest now that they’re adults
• Bought insurance to support your spouse, who has passed away
• Retire and no longer need to replace income at death

… or just need cash, a life settlement may work. With the proceeds, you could pay off debt, finance long-term care insurance, beef up your emergency fund, or supplement retirement income.

The amounts received from life settlement transactions depend on how much premium an investor still needs to pay, and how long it will be until they collect the death benefit. All depends on the life expectancy of the insured person.

On average, you can expect a payout of about 26-40% of the death benefit – and you can expect to pay tax on a portion of it.

If you own life insurance, and

• Are age 65+
• Had health changes in the past 5 years
• The policy death benefit is $250,000+
• Own universal, variable, or convertible term insurance

… the Monarch team can give you an estimate of the net value of your policy and preview the life settlement process for you.

The application includes health questions and review of medical records. Once life expectancy is estimated, we put the policy into auction, working to bid the price up as far as possible. By contrast, companies offering life settlements on TV are looking to buy policies for their own investors and do not offer a competitive bidding process.

Who bids on something they’ll only get a return on when someone dies? Who are these mysterious third parties?

Turns out there’s not much mystery. In this era of low interest rates, investors are looking for solid returns. These are institutional investors – pension funds, mutual funds, financial institutions – not individuals. They buy large bundles of life settlements, much as mortgages are resold in bundles. The insurance policies themselves are held in a blind trust, meaning that investors never know the identities of the policyholders.

Settling a policy is a big decision. The process can get complicated. You can hire the late-night TV guys, whose job it is to maximize return for the investors who buy policies. Or you can engage an independent life settlement broker, whose job it is to get the largest settlement for you. With our Life Settlement Advocacy Program™, Monarch Insurance Partners operates as your independent life settlement broker.