Viatical Settlements

Definition

Viatical settlements are financial agreements in which a life insurance policyholder sells their policy to a third party for a lump sum payment that is less than the death benefit but more than the cash surrender value. This option is typically pursued by individuals with terminal illnesses who need immediate cash to cover medical expenses or other urgent needs. Viatical settlements provide an alternative to traditional policy surrender, allowing individuals to access funds while they are still alive.

5 Must Know Facts For Your Next Test

1. Viatical settlements were first popularized in the 1980s as a way for individuals with terminal illnesses to obtain funds for medical care and personal needs.
2. The lump sum received from a viatical settlement can be significantly higher than the cash surrender value but lower than the death benefit, providing immediate liquidity.
3. Viatical settlements are regulated in many states to protect consumers from potential exploitation and ensure transparency in the transaction process.
4. The buyer of the viatical settlement assumes responsibility for paying premiums on the life insurance policy until the insured passes away.
5. The market for viatical settlements has evolved, and now many institutional investors purchase these policies, viewing them as alternative investments.

Review Questions

• How do viatical settlements differ from simply surrendering a life insurance policy?
  • Viatical settlements differ from surrendering a life insurance policy in that they provide the policyholder with immediate cash based on the value of their life insurance while still alive. When surrendering a policy, the holder receives only the cash surrender value, which is typically much lower than what they could receive from selling their policy through a viatical settlement. This option allows individuals facing terminal illness to access funds for urgent needs without losing all benefits associated with their life insurance.
• Discuss the regulatory environment surrounding viatical settlements and its importance for consumers.
  • The regulatory environment surrounding viatical settlements is crucial for protecting consumers from potential fraud and exploitation during these transactions. Many states have implemented laws requiring disclosure of terms and conditions, as well as licensing requirements for viatical settlement providers. These regulations ensure that individuals understand their options and the implications of selling their life insurance policies, promoting transparency and fairness in the market.
• Evaluate the impact of viatical settlements on the broader insurance industry and consumer behavior.
  • Viatical settlements have influenced the insurance industry by creating new financial products and options for policyholders, particularly those with terminal illnesses. This development has led to greater awareness among consumers regarding their choices related to life insurance policies. Additionally, it has prompted insurers to consider how policies are valued and managed, ultimately affecting premium pricing and coverage options. The growth of this market has encouraged both innovation and increased scrutiny within the industry as it adapts to meet consumer needs.

Related terms

Life Insurance Policy: A contract between an insurer and a policyholder, where the insurer agrees to pay a specified amount upon the death of the insured or after a set period.

Death Benefit: The amount of money that is paid out to beneficiaries upon the death of the insured person under a life insurance policy.

Cash Surrender Value: The amount of money a policyholder would receive if they decided to cancel their life insurance policy before it matures or before the insured event occurs.