Contemplating death especially in the case of a terminally ill person is not a happy thought. However the realities of life can be exceedingly harsh and we have no choice but to accept and make rational decisions when required. In this context the article discusses the advantages and disadvantages of viatical life insurance.
Viatical life insurance is an arrangement by which a person with a terminal disease sells their life insurance policy. The sale is carried out at a discounted price on the face value of the policy for instant cash. The buyer of the policy can and will cash in the policy at its full value when the seller departs from this life.
The seller or viator sells to a buyer or funder, usually an investment company, which will pay the seller a one time payment of approximately 50-80 percent of the face value of the policy. They buyer continues to pay the premiums on the policy up to the time the person dies. This type of scheme first made its appearance in the 1980s when AIDS patients had to cover very high medical bills but did not have ready cash to do so.
There are advantages to viatical life insurance investment.
For the seller or viator:
– Benefiting from the money when it is most need is a major advantage – you can get fast access to 50 or more percent of the face value of the policy while still alive.
– Once the policy is sold, the viator is not responsible for making premium payments; future payments if applicable become the responsibility of the buyer.
– There is no tax liability attached to the sale of the insurance policy.
For the buyer or investor:
– In most cases there is no tax levied on the settlements and the investor is exempt from making additional payments apart from the principal amount on the policy.
– Almost 99 percent of all life insurance policies are eligible for viatical settlement.
– Upon the death of the viator, the investor stops paying the premium and can cash in the policy for its full face value.
The disadvantages of viatical life insurance may be summarized as follows:
– The viator has no control over the policy once it is sold; normally the payout amount is only 50 percent of the face value of the policy and any cash value attached to the policy is transferred to the buyer.
– The investor may have to pay extra fees and state taxes, depending on state laws; the investor has to pay the premiums until the viator dies; the investor’s rate of return reduces the longer the viator lives.
This type of policy has an extremely morbid ring to it and forces us to acknowledge the inevitability of our own death. However, when viewed in a practical light it really is a sensible solution. You have a policy but cannot touch it until you are dead, of what use is money to a dead person?