Are Viatical Settlements Legal?

A viatical settlement offers much-needed cash in exchange for a life insurance policy to people who have a terminal illness and a life expectancy of fewer than two years.

Since it’s common for a terminally ill person to live longer or die sooner than predicted by medical professionals, a viatical settlement involves many unknown factors.

The amount of money an insured person may receive is higher than the cash surrender value and lower than the death benefit. For this reason, a viatical settlement is a good choice for many people who own permanent life insurance policies and want or need to access the value before their death.

The viatical settlement and life settlement industries are well-established. Your permanent life insurance policy is a financial asset much like any other. You have the legal right to sell it in the marketplace. Not only are viatical settlements legal in the U.S., they are also well-regulated.

History of viatical settlements

The viatical settlement industry has roots in the AIDS epidemic of the 1980s, when patients who had large life insurance policies, but a short lifespan needed access to immediate cash for expensive experimental treatments and living expenses.

At first, viatical settlements were a great cash-providing resource for people with a terminal illness. Unfortunately, a small number of unethical firms took advantage of the situation and made a lot of money by treating the insured and terminally ill policyholders unfairly.

The insurance industry responded to the rise in popularity of viatical settlements by offering Accelerated Death Benefit (ADB) riders to their clients at no charge. The insured person could then get a percentage of the face value of their life insurance policy if they were diagnosed with a terminal illness. Upon their death, the remainder of the policy would go to their named beneficiaries.

In the late 1990s, viatical settlement brokerages responded to investor demand for this high-profit industry. State and federal laws regulating the viatical settlement industry didn’t yet exist, putting investors and the terminally ill policy owners at a disadvantage.

Current laws and regulations protect the insured person in a viatical settlement

More than 90% of the population of the United States and Puerto Rico live in areas where viatical settlements and life settlements are regulated by state laws. While most states have a mandatory waiting period before it’s possible to sell a life insurance policy, their laws also include provisions that allow a terminally ill policyholder to sell their life insurance for cash through a viatical settlement without a waiting period.

Legal alternatives to viatical settlement

Before participating in a viatical settlement, it’s important to evaluate all the alternatives.

Cashing in a life insurance policy

Life insurance policies that include a cash value investment may be surrendered for the cash value built up over time. Anyone who meets the criteria of the insurance company for cashing out their life insurance policy can do so, regardless of their age or health status. Cashing in a life insurance policy eliminates the death benefit.

The cash value of a life insurance policy is always less than the net amount an insured person would receive in a viatical settlement or life settlement.

Policy loan

Anyone who has a permanent life insurance policy with cash value can get a loan from the insurance company and use the policy as collateral. These loans generally have a smaller interest rate than a personal loan from a bank or a credit card.

Taking out a policy loan provides the insured person with access to cash without canceling the death benefit. Any outstanding loan amount will be taken from the death benefit upon the insured person’s death.

Accelerated death benefit

Some life insurance policies include a rider allowing the insured person to access a portion of the death benefit if they become terminally ill. The amount of the accelerated death benefit reduces the death benefit proportionally.

How to find out what your life insurance policy is worth in a viatical settlement

When you decide to pursue the option of selling your life insurance, you can get an estimate of what your life insurance policy may be worth, here.

Of course, everyone’s situation is different, and this is just an estimate. It may help you decide whether to explore the idea, further. A broker can help you get the best possible offers for your life insurance policy.

It doesn’t cost anything to get an estimate, and you aren’t under any obligation to go through with the sale until you agree with a provider on price.

How laws and regulations protect you in a viatical settlement

It’s important to work with brokers and buyers that are licensed in the state where you live. The Life Insurance Settlement Association (LISA) website offers extensive information about the life settlement and viatical settlement industry and the laws and regulations that protect consumers as they go through the process.

In some states, there’s no difference between a viatical settlement and a life settlement; the laws apply to both types of transactions and are in place to protect consumers.

Throughout the process, your medical and financial information is protected. You’ll provide permission before underwriters, medical professionals, or any entity associated with the viatical settlement process can access your personal information.

After you agree to sell your life insurance policy for a specific price, the investor will deposit the money in an escrow account with a major financial institution. You’ll receive paperwork, including the Transfer of Policy Ownership and Agreement of Sale. Before you sign over your policy, you’ll be able to verify that the funds are in escrow.

Each state has its own “rescission period” requirements. During this pre-determined amount of time, you have the option to change your mind, return the settlement money, and regain ownership of your life insurance policy.

Before entering into a viatical settlement, speak with a financial advisor and tax professional about any potential affect the settlement may have on governmental benefits, Medicaid eligibility, and whether the settlement amount is taxable.