Viatical Settlements

Viatical settlements allow terminally ill persons to sell life insurance policies for cash before they die. In these transactions, a company pays a client a percentage of the policy's face value (generally 50%-85%) and pays the insurance premiums for the remainder of the seller's life. In exchange, the company becomes the policy's beneficiary and collects the entire death benefit when the policyholder dies.

Viatical settlements emerged in the late 1980s in response to the AIDS crisis, but are now offered to those suffering from other diseases. For persons facing death, viatical settlements can provide much-needed relief from financial burdens and improve the quality of life or medical care. Because of the newness of the industry, however, very few states have laws guarding against abusive practices. Furthermore, people in this position face overwhelming emotional and physical demands and may not want to devote the time or energy necessary to make an informed decision. The following guidelines can help avoid costly mistakes:

• If you have a group life policy at your workplace and plan to leave your job, do not let the policy expire. Many group policies let employees change to an individual policy within a month of their departure, but companies are not required by law to inform employees of this option.
• Investigate all your options. Under certain circumstances, your life insurance policy may allow for accelerated payments yet still preserve some benefits for your original beneficiary. Borrowing from the insurer or from the beneficiary may be another possibility.
• Resist high pressure sales tactics. Solicit bids from several companies to improve your chances of getting the best offer.
• Seek expert advice from a lawyer, accountant, or financial planner that you trust. Payments obtained from viatical settlements are currently taxed as income (although pending legislation may make them tax exempt) and may affect eligibility for government aid. Viatical settlements also have probate and estate consequences.
• Verify that the company has the full payment readily available. Do not accept partial payment or installments. Ask the company to put the money from the sale into an escrow account until the transaction is completed.
• Check with your state insurance department to see if there are complaints against the company and if the company has met licensing requirements.