Viatical Settlements and Life Settlements

Question 1

Viatical Settlement

Answer 1

A Viatical Settlement is an agreement between a third party who specializes in such transactions (viatical settlement provider) and a life insurance policyowner (viator) insuring the life of an individual with a life-threatening or terminal illness. Normally, the terminally-ill insured must have a life expectancy of 2 years or less. The firm purchases the policy at 60 to 80% of the face amount, expecting to profit as the new policyowner at the time of claim. The insured is provided with tax exempt discounted value during the terminal illness, but must relinquish all ownership rights to the buyer.

Question 2

Life Settlement

Answer 2

A Life Settlement is similar to a viatical settlement in that it is the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its death benefit. There is no requirement for the insured to be terminally ill in order for a life settlement to occur, whereas, there is with a viatical settlement. A policyowner may choose to sell their policy because the premiums are too high or they want to purchase a different policy.