Legal Definitions - viatical settlement

A viatical settlement is a financial arrangement where an individual with a life-threatening or terminal illness sells their existing life insurance policy to a third party. In exchange for the policy, the original policyholder receives a lump sum cash payment. This payment is typically less than the policy's full death benefit but more than its cash surrender value (the amount the insurance company would pay if the policy were simply canceled). The third party, known as the viatical provider, then becomes the new owner and beneficiary of the policy, takes over all future premium payments, and receives the full death benefit when the original policyholder passes away. This option provides immediate financial liquidity to individuals facing severe health challenges.

• Example 1: Funding Medical Care and Comfort

  Maria has been diagnosed with advanced lung cancer and has a $750,000 life insurance policy. Her medical treatments are extensive and costly, and she also wishes to make her remaining time as comfortable as possible, perhaps even taking a final trip with her family. Instead of letting the policy lapse or waiting for her beneficiaries to receive the death benefit much later, Maria decides to enter into a viatical settlement. She sells her policy to a viatical provider for a lump sum of $450,000. This immediate cash allows her to cover her significant medical bills, enjoy quality time with her family, and ensure her comfort during her illness. The viatical provider now owns the policy, pays the remaining premiums, and will receive the $750,000 death benefit when Maria passes away.

• Example 2: Alleviating Financial Burden

  John, a retired engineer, has been diagnosed with amyotrophic lateral sclerosis (ALS), a progressive neurodegenerative disease. He has a $300,000 whole life insurance policy but is struggling to cover the increasing costs of in-home care, specialized equipment, and modifications to his home. He also has some outstanding debts he wishes to clear to avoid burdening his family after his passing. John opts for a viatical settlement. He sells his life insurance policy to a viatical settlement company for $180,000. This money allows him to pay off his medical debts, purchase necessary adaptive equipment for his home, and ensure his wife won't inherit any financial burdens. The settlement company assumes responsibility for the policy's premiums and will collect the $300,000 death benefit upon John's passing.

• Example 3: Securing Immediate Family Needs

  Sarah, a single mother, was diagnosed with a severe autoimmune disease that has significantly shortened her life expectancy. She has a $500,000 term life insurance policy that she originally purchased to provide for her two young children. However, her current financial situation is dire due to her inability to work, and she needs immediate funds to cover essential living expenses like rent, groceries, and her children's education. Sarah decides to pursue a viatical settlement. She sells her policy to a provider for $280,000. This immediate cash infusion helps her pay for crucial expenses, providing stability and support for her children during a challenging time. The viatical provider takes over the policy, pays the premiums, and will receive the $500,000 death benefit when Sarah passes away, ensuring her children are still provided for, albeit through a different mechanism.