If you are suffering from a terminal illness, you may find yourself without enough money to pay for everyday necessities due to overwhelming medical expenses. You need cash quickly, so you may consider selling your life insurance policy. However, before you do, you should consider whether this is really the best solution to your cash flow problem.
Selling a life insurance policy is called “viatication.” The policy owner, usually a terminally ill person with a life expectancy of less than two years, sells their policy to a third-party for a lump sum cash settlement. The amount the policy owner receives is typically less than the face value of the policy, but more than the current cash surrender value. A viatical settlement can be as much as 50 to 80 percent of the policy’s face value.
The third party, who may be an individual investor or a viatical company, is responsible for paying the premiums and becomes the designated beneficiary on the policy.
Elephant in the room
In spite of how attractive the prospect of receiving a large sum of money all at once may be, there are some things you should consider before agreeing to a viatical settlement:
- Indiscriminate access to your private medical records – The viatical company will continually scrutinize your medical records to follow your prognosis because the longer you live, the less they will get from your policy. In addition, they will probably not use discretion when contacting you. They may communicate with you by phone or mail, and that can make your personal business known to others.
- Negative financial implications – You should discuss with a financial planner if accepting a settlement will negatively impact probate and estate settlements. Also, you need to determine if the proceeds of the viatical settlement are considered taxable income. Under the Health Insurance Portability and Accountability Act, if the insured is terminally ill, the settlement is not subject to federal income taxes; but if the illness isn’t serious or the insured is healthy, the settlement is considered a capital gain and taxed accordingly.
- Negative impact on your eligibility for public assistance – Since public assistance is based on financial need, receiving a large settlement could affect whether you receive public assistance, and how much you receive.
- The reputability of the viatical company – Payout amounts vary by company, so you should shop around and compare. The Viatical Association of America recommends getting at least three different offers. In addition, you should contact your state insurance department to see if there are any laws that regulate how viatical companies operate and whether or not they need to be licensed.
Think Twice or maybe 3 times
Since selling your life insurance policy affects your family, you should discuss it with them before you make your decision. If they are depending on the policy proceeds to pay the remaining cost of your medical treatment, or for funeral expenses, they may need time to make other arrangements.
Finally, look for other alternatives. Ask your insurance company if they offer an accelerated death benefit. This provides for the payment of a portion of your life insurance policy proceeds while you are still living. Your insurer may charge you a fee, but you still retain ownership of your policy.