Life insurance options are never easy to wade through. This is true for both young adults thinking about securing the financial future for a growing family and elderly patients suffering from any number of pains or diseases. The trouble for many prospective buyers is the variety of available types of life insurance policies. This only gets more complicated as a policyholder begins to consider a life insurance settlement to reshuffle their financial outlook.
Life insurance settlements can be a little confusing at first, but essentially this is simply the practice of selling your life insurance policy—namely its eventual payout—in exchange for an immediate lump sum check. These instruments might be simply explained, but they are tricky to navigate and receive both a considerable amount of praise and flack. Viatical settlements, as they are known are not for everyone, so knowing where you stand is essential when considering selling your policy.
The Upside
Viatical settlement companies offer something that is not often readily available to those looking for a fast cash infusion. Some sellers use their cash to go on a dream vacation with family, but the majority of settlements in the United States today are used to pay for unforeseen and often overwhelming medical expenses. Simply put, you would be hard-pressed to find a bank willing to extend a substantial line of credit for the purpose of weekly cancer treatments; its callous, but its also bad business.
Viatical settlements can ease this pressure to miraculously come up with the money. They serve as a fantastic resource to access the funds you have been paying into for years before you are gone. Life insurance has traditionally served as a means to protect spouses or children from uncertainty after a tragedy, but settlements have changed the nature of these investments and made accessing them in life a real option.
Similarly, viaticals can challenge the prevailing status quo that allows insurance companies to keep your money without ever paying out on the policy. This is a booming business since almost 90% of policies lapse, and only about 2% of policyholders ever receive a death claim payout. These are staggering numbers for something that is supposed to act as a shield for your family.
The Catch
While viatical settlements offer a great opportunity for many aging life insurance policyholders, there are also some unsavory aspects of the industry that must be taken into consideration. Settlements pay out more than the cash value but less than the death benefit that you would receive if you were to maintain the policy yourself. So it is important to understand that you are leaving some, and possibly a great deal, of money on the table by accepting a cash payout in advance.
This may not matter, you may be contemplating a viatical settlement precisely because you don’t need the safety net anymore and are thinking of abandoning the policy; life insurance is often purchased in order to protect young children or a spouse during working years. In this case, you actually stand to receive more than you would otherwise.
Another important consideration is the actual finances associated with this decision. Payouts run the gamut based on your age, health, lifestyle, and a million other factors, but typically you will receive much less than the eventual death payout would net if you were to maintain the policy. As well, a death benefit is passed down tax-free, whereas a payout is considered in the same realm as taxable salary.
Finally, the industry is opening up to increasing regulation but remains somewhat hard to navigate. For terminally ill patients, navigating this process can easily become overwhelming without the help of third-party counsel—someone who will also receive a fee for their service.
Viatical settlements are a great opportunity to access your investment while you are still able to benefit from the cash you have put away, either for a life-saving procedure or something more fun. However, as with any of the financial decisions you must make, choosing this path takes quite a bit of consideration and should not be made lightly.
