Understanding Viatical Settlements, aka Selling Your Life Insurance Policy
You see and hear the commercials everywhere. “Do you have an insurance policy you no longer need? Now you can sell your policy for an immediate cash payment.”
What’s fueling these ads is a viatical settlement, which is an agreement whereby a person with life insurance sells the life insurance policy to a third party, making the purchaser the owner and the beneficiary of that life insurance policy. In exchange, the buyer issues a check to the insured.
The industry rose in prominence during the AIDS epidemic. For example, if a young man aged 30 was diagnosed with AIDS with a 20-year level premium term life insurance policy of $100,000 and a monthly premium of $72 per month, he very often could not afford to maintain that policy.
Due to his diagnosis and likely prognosis, companies arose who might purchase that life insurance policy for $15,000. Had the young man simply quit making payments, the policy would have expired and there would be no value to that policy. By continuing to make the payments, the viatical company now owns the policy and is the beneficiary of the policy. If the young man died three years later, the viatical company would receive the $100,000.
The risk in these circumstances fell to the viatical company. Due to excellent research work, many AIDS patients lived far beyond the original expectation and as such, if the company issued a check for $15,000 to this young man, and he lived to be 70, the viatical company lost $15,000 plus whatever premiums they paid.
This industry has continued to develop and is still a viable business operation that may be helpful for someone who has received a difficult diagnosis and can no longer afford premiums on life insurance. Abacus and Harbor Life Settlements are two of the companies who advertise occasionally and have good reputations in this arena. There are other companies which are also viable and, in these circumstances, if you wish to enter into one of these contracts, you can shop the contract between several different companies.
If, of course, an individual has sufficient cash reserves to continue paying the premium, he can simply continue paying the premium.
We have also assisted many families in what are effectively “private viatical settlements.” In many of our elder law cases, where one of the parents is terminally ill and has a life insurance policy with either no cash value or a low cash value, often times one of the children can purchase the policy for the “surrender value” and then continue making the premium payments.
In these examples, if a parent has a $100,000 life insurance policy with a $5,000 cash value and monthly premiums of $300 per month, the child could purchase the policy by paying their parent $5,000, becoming the owner and beneficiary of the policy. If the parent lives six months and then passes away, the child then receives a $100,000 death benefit.
Private viatical settlements are appropriate for many circumstances and while out of favor with the life insurance industry, the family maintains some modest wealth under difficult circumstances.
For more information, please contact one of our estate planning lawyers.