A viator is an individual diagnosed with a life-threatening illness who chooses to sell their life insurance policy to access a portion of their death benefit while still alive. This financial transaction often aims to secure funds for expensive medical treatments or other critical needs when other options may not be available or sufficient.
What Drives Individuals to Become Viators?
People diagnosed with terminal illnesses often face significant financial burdens. When conventional health insurance fails to cover the costs of life-extending treatments, viators might resort to selling their life insurance policies, providing them access to immediate funds.
Key Motivations:
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Expensive Medical Treatment: The primary driver for most viators is the need for expensive or experimental therapies that may not be covered by their insurance. For instance, progressive treatments for conditions such as cancer, which don’t guarantee coverage, put pressure on patients to seek alternative funding.
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Quality of Life Improvements: Many treatments focus on not just prolonging life, but also improving the quality of life. For example, viators may pursue pain management therapies or therapies to alleviate debilitating symptoms that insurance doesn’t adequately cover.
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Financial Independence: Individuals like viators often find themselves in a position where their family may no longer require financial support through life insurance, making this decision more palatable.
The Viatical Settlement Process
The transaction in which a viator sells their life insurance policy to a third-party buyer is known as a viatical settlement. Here’s how the process typically works:
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Finding a Viatical Settlement Provider (VSP): The viator must locate a VSP interested in purchasing their policy. Many states have insurance regulators that provide lists of approved settlement providers.
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Negotiating the Settlement: The settlement amount is generally between 50% to 70% of the policy's face value, depending on factors such as the viator's life expectancy and the health status.
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Finalizing the Transaction: Once a settlement agreement is reached, the viator relinquishes all rights to the policy. The VSP takes over the policy, and they are responsible for maintaining any premium payments.
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Payment and Future Obligations: Upon the death of the viator, the VSP collects the full death benefit of the policy. If the viator's condition improves, the VSP assumes the financial risk of ongoing premium payments.
Tax Implications
Proceeds from a viatical settlement are typically tax-free, making them an appealing option for those in dire financial need.
Types of Life Insurance Policies that Can be Sold
Viators can usually sell various kinds of life insurance policies, including:
- Term Life Insurance: Policies that offer coverage for a predetermined period, even if they are set to expire soon.
- Whole Life Insurance: Policies that offer lifelong coverage and contain a cash value account that can be accessed.
- Universal Life Insurance: Flexible premium policies that can adjust the death benefit and cash value.
Risks Involved in Viatical Settlements for Investors
While viatical settlements can provide liquidity for those needing immediate funds, they also represent a risk for the purchasing VSP. If a viator experiences a health improvement or a delay in death, the investor may incur unexpected expenses from continued premium payments, which could reduce their return on investment.
Example Scenario
Consider the example of Ted Smith, who learns he has terminal cancer with a limited prognosis. Having previously taken out a $500,000 life insurance policy, he seeks to finance an experimental treatment deemed effective but costly. By selling his policy to a VSP for $250,000, he gains immediate funds to pursue treatment and improve his life quality.
Suppose Ted's treatment goes well, and he experiences remission. Here, the VSP assumes the obligations related to the policy and faces a prolonged financial commitment, affecting their anticipated profit.
Final Thoughts
Viators are often in desperate circumstances, seeking to alleviate the financial and emotional pressures associated with terminal illness. If considering a viatical settlement, it's vital to explore all options thoroughly, assessing the implications for both immediate financial needs and potential effects on beneficiaries.
Engaging with reputable VSPs and understanding the risks and benefits can ensure a more informed decision that aligns with both personal needs and family considerations. Remember, navigating these complex decisions warrants careful thought and, when possible, professional financial or legal advice.