A life settlement or viatical settlement can be a powerful financial tool capable of helping you manage steep medical debt (a terribly common problem) and other demands on your cash. Both types of settlements allow a person to sell his or her life insurance policy for cash, essentially liquidating an otherwise illiquid asset. That can be remarkably advantageous, but, like so many other financial strategies and tools, life settlements and viatical settlements are only efficient and effective in the right situations and in the right hands.
There are many reasons to consider selling your life insurance policy, and the decision to do should be made carefully and with the advice of experts. Here’s everything you need to know about life settlements and viatical settlements to help you make the best possible use of those options!
First things first: Let’s consider what life settlements and viatical settlements actually do.
There are differences between life settlements and viatical settlements (more on that later), but they both do one basic thing: They exchange a life insurance policy (and its eventual, inevitable payout) for cash now.
The cash value of a viatical or life settlement will be a bit less than the value of the eventual payout. That’s how the other party makes money in this situation. But it can be extremely beneficial to the party selling his or her life insurance, because cash in hand can be worth so much more than a payout that comes later — especially in this situation, where the payout comes, by definition, after you’re no longer around to enjoy it.
Life settlements and viatical settlements are designed to be late-in-life financial tools, explain the pros at the aptly named Sell My Life Insurance Policy company. They wouldn’t make sense for either party in the case of a young breadwinner. The loss of the payout could be potentially devastating in such a situation (since an early passing can cost a family income and more), and the investment would be unpredictable (it could payout next year or in 30 years).
By contrast, an older or terminally ill individual’s life insurance payout will arrive on a more predictable timeline, and the party may no longer need a big safety net for his or her beneficiaries. After retirement, there’s simply no salary for the family to lose. That’s when selling a life insurance policy makes sense for everyone.
The differences between viatical settlements and life settlements
“Settling” a policy swaps cash for the insurance payout in every case, but there are two main ways to pull one off. Life settlements are the more basic sort, and work just as described above. Viatical settlements work similarly, but are tax-exempt. That makes them potentially more appealing, but they’re not available to everyone.
To get a viatical settlement, a person has to have a life expectancy of less than 24 months and must be chronically or terminally ill. The more predictable payout of a viatical settlement makes it more attractive to parties that buy policies, and the health-related circumstances are why the move is tax exempt.
Selling your policy
If you need cash more than you need a life insurance payout, and if you have an existing life insurance policy and meet certain basic criteria, it could be wise to choose a life settlement (or, if you’re eligible, a viatical settlement). So how can you go about doing that?
Start by discussing the options with your financial advisor. Then, turn to a broker who specializes in managing life settlements and viatical settlements. Your broker will do the tricky parts for you and will land you the best possible deal available under your circumstances. Hopefully, a cash payout will let you pay down your medical bills and enjoy life to the fullest in all of the time that you have left.