Legal Definitions - Investor Protection Guide: Viaticals

A viatical settlement is a financial arrangement where an individual sells their existing life insurance policy to a third party for a cash payment. This payment is less than the policy's full death benefit but typically more than its cash surrender value (if any). The original policyholder, often facing a serious illness or needing immediate funds, receives a lump sum while they are still alive. In return, the buyer (an investor) takes over ownership of the policy, pays all future premiums, and ultimately receives the full death benefit when the original policyholder passes away.

While often associated with individuals who have a shortened life expectancy due to illness, similar transactions for healthy individuals are typically referred to as "life settlements."

Key aspects of a viatical settlement:

• Seller: The original policyholder who needs immediate cash.
• Buyer: An investor who purchases the policy.
• Benefit for seller: Access to a portion of their life insurance policy's value while still alive, providing liquidity for medical expenses, living costs, or other financial needs.
• Benefit for buyer: Potential for a return on investment when the policy pays out.
• Risk for buyer: The actual return depends heavily on the original policyholder's lifespan. If the policyholder lives longer than anticipated, the investor's return may decrease, or they might even lose money due to ongoing premium payments.

Examples of Viatical Settlements:

• Example 1: Funding Critical Medical Treatment
  Scenario: Maria, a 65-year-old woman, is diagnosed with a rare and aggressive form of cancer. Her health insurance covers standard treatments, but she wishes to pursue an experimental therapy that is not covered and costs a significant amount of money. Maria has a $750,000 life insurance policy that she no longer needs for its original purpose of providing for her adult children. To fund her treatment, she decides to sell her policy through a viatical settlement to an investment firm. The firm pays her $450,000 upfront. In exchange, the firm becomes the new owner of the policy, assumes responsibility for all future premium payments, and will receive the $750,000 death benefit when Maria passes away.

  Explanation: This illustrates how a viatical settlement provides immediate liquidity for a terminally ill individual to cover critical expenses, such as specialized medical care, by converting a future death benefit into present-day cash.

• Example 2: Covering Long-Term Care Costs
  Scenario: Robert, an 82-year-old retired teacher, requires full-time care in an assisted living facility. His savings are dwindling rapidly, and his long-term care insurance policy only covers a portion of the costs. He holds a whole life insurance policy with a $300,000 death benefit. To ensure he can continue receiving the care he needs without burdening his family or liquidating other assets, Robert enters into a viatical settlement. An investor purchases his policy for $180,000. The investor then becomes responsible for all subsequent premium payments and will collect the $300,000 death benefit upon Robert's eventual passing.

  Explanation: This demonstrates how a viatical settlement can be used by an elderly individual, even without a specific terminal diagnosis, to manage significant ongoing expenses like long-term care by monetizing a life insurance policy that is no longer essential for its original purpose.

• Example 3: Addressing Business Debt During Financial Hardship
  Scenario: Sarah, a 55-year-old entrepreneur, faces severe financial difficulties with her small business due to an unexpected economic downturn. She needs a substantial amount of capital to pay off creditors and prevent her business from going bankrupt. Although not terminally ill, she has a personal life insurance policy with a $1,000,000 death benefit that she realizes could provide the necessary funds. She decides to sell this policy through a viatical (or life) settlement to a specialized investment fund. The fund pays her $650,000, which she uses to stabilize her business. The fund then assumes all future premium payments and will collect the $1,000,000 death benefit when Sarah eventually dies.

  Explanation: This example shows that viatical settlements (often referred to as life settlements when the insured is not terminally ill) can also serve as a source of immediate capital for individuals facing significant financial distress, allowing them to convert a non-liquid asset into cash to address urgent debts or business needs.