Dealing with a chronic or terminal illness brings many difficulties. One of those challenges is the financial aspects of financing a medical crisis. You may be considering a viatical settlement to help pay for your healthcare. This is a viable option for some people.
If you’re suffering from a terminal or chronic illness, a viatical settlement allows you to cash in your life insurance policy for an amount larger than the face value of the policy. The person who buys your policy takes over all responsibilities, including making the premium payments. You can then use the cash payout to finance your medical care.
Types of Viatical Settlements
There are two main types of viatical settlements. One type is designed for chronically ill patients who are no longer able to perform activities of daily living without assistance, such as bathing, dressing and eating. The other type of viatical settlement is for individuals who are terminally ill and have fewer than two years to live.
Benefits of a Viatical Settlement
In certain circumstances, viatical settlements provide an excellent method of securing funds for medical related costs. Here are several benefits of seeking a viatical settlement.
- Funds are readily available. Once the transaction is complete, you generally receive your funds from the viatical settlement quickly. This is helpful if you have pending medical costs.
- Settlement money can be used however you choose. The money you receive for your viatical settlement can be used at your discretion. There are no restrictions.
- Cuts costs from your budget. You no longer need to make monthly insurance premium payments when you secure a viatical settlement. Freeing your budget of insurance premiums gives you additional funds for medical care and to settle outstanding debts.
- Proceeds are tax-free. Viatical settlement funds are exempted from federal income tax per the 1996 Health Insurance Portability and Accountability Act (HIPAA). There could be state taxes, however. It is always advisable to consult your accountant or tax advisor before the sale of any insurance asset.
- Potentially large cash payout. You will receive a lump sum payout that is larger than the surrender value of your policy. This can be a substantial amount of money. Viatical settlements pay significantly more than traditional life settlements. If your condition is deemed terminal by a medical expert, you will receive the largest cash payout possible with a viatical settlement.
- There is no age requirement. Unlike life settlements, which are only available to those 65 years of age and older, you can get a viatical settlement at any age.
- Generally, every type of life insurance is eligible for a viatical settlement. Check with your insurance carrier and a viatical settlement company to ensure that your policy is eligible. It must have been in place for at least two years.
Drawbacks of a Viatical Settlement
As with any major financial transaction, there are some cons to consider. Knowing and understanding the following potential drawbacks of viatical settlements will help you determine if one is right for you.
- Less money overall. While your lump sum payout will be more than the surrender value of the policy, it will be less than what your family would have gotten if they received the death benefit when you are gone. After you pass, they won’t receive anything from your life insurance policy.
- Ineligibility for other forms of aid can occur. You may no longer be eligible for Medicaid or food stamps.
- Creditors may come calling. If you owe money, those you owe could make claims against your viatical settlement. This could mean having to pay debt rather than use the money for your medical care. If you owe creditors and decide to do a viatical settlement, contact them prior to arrange for payment so you aren’t caught by surprise.
- Potential transaction costs. Check before making a viatical settlement regarding fees that could eat into your payout.
- Minimum age of life insurance policy for eligibility. If your policy is younger than two years old, you aren’t eligible for a viatical settlement.
When you’re suffering from a debilitating or life-threatening illness, a viatical settlement can help make your life a bit easier. Before making a final decision, take the time to consider the pros and cons.