James Metz, MD
Abramson Cancer Center of the University of Pennsylvania
Last Modified: March 27, 2002
A viatical settlement is the purchase of a life insurance policy from a terminally ill patient in exchange for a cash percentage of the policies worth. Patients can sell all or part of their life insurance policy for immediate cash. Viatical settlements are not for everyone, but they are an important option for those that need money to pay bills, cover expensive home care, or replace income from lost employment. Up to 31% of families become impoverished while managing the illness of a loved one with terminal disease. Viatical settlements are one option to avoid such a situation.
How do viatical settlements work? The seller of an insurance policy names the purchaser as beneficiary. A viatical company is the purchaser of the policy. In exchange, the seller receives a lump sum payment at the time of the sale. The amount paid for an applicant?s policy is determined by the prevailing interest rates, premium obligations, projected life expectancy, and face value of the policy. The seller usually receives between 45-60% of the face value of the policy. The purchaser of the policy becomes responsible for all future premium payments, regardless of how long the seller lives. There are no restrictions on how the funds can be utilized. The entire process usually takes about one month. Most insurance policies qualify for settlements.
Due to the Health Insurance Portability and Accountability Act, individuals with chronic or life threatening illnesses may be able to receive viatical settlement proceeds free from any federal income tax. A viatical settlement can be structured so that it does not effect needs-based entitlements such as those from Social Security and Disability Insurance.
In the United States, viatical companies are required to obtain a license in most states. Make sure the company is legitimate. Check with your state Consumer Affairs Office or Insurance Commissioner to see if there have been any complaints lodged against the company.