According to a survey taken by LIMRA in 2018, only sixty percent of Americans have life insurance. Furthermore, a fifth of that number do not believe that their life insurance policy is sufficient.
Life insurance policies are there to ensure that loved ones are financially taken care of in the event of a policyholder’s sudden, and untimely, passing. As such, a payout from the insurance company (otherwise known as the “death benefit”) is never really seen nor used by the policyholder themselves. Furthermore, it is often spent on funeral costs and, in some cases, medical bills that have stemmed from palliative end-of-life care—should the original policyholder have been a terminally ill patient or died from a chronic illness.
It’s fair to say that, to many, life insurance is something that no one wants to have to use, nor actively wants to consider. However, those that do already have an insurance policy in place might also be surprised to learn that they can use their payout before it’s intended. An insured person’s death benefit doesn’t have to be quite a benefit of their death.
Here are a few ways that life insurance policyholders can gain a lump sum, by “selling” their insurance policy.
Viatical settlements are very much like a transaction, with a life insurance as the purchase. The way that they work is this: A life insurance policyholder is unfortunately diagnosed with a chronic or terminal illness, and that diagnosis results in a life expectancy of two years or less. They choose to surrender their insurance to a third party (who will become the beneficiary) via a viatical broker, for a lump sum cash payment. (This amount will be both less than the death benefit will be, but more than the cash surrender value is, had they closed the policy with the insurance company.) From there, the beneficiary continues to pay the monthly premiums, and is able to cash in for the full death benefit when the original policyholder passes away. However, once the beneficiary has paid the viatical settlement, the original life insurance policyholder has no more involvement and is free to move on.
The reason why viaticals are growing in popularity, despite the cash value that’s offered being less than the death benefit, is because they provide the money upfront. Brokers, such as the experts at the American Life Fund, work to ensure that the viatical settlement is as high as possible—some even reaching a payout that is seventy percent of what the death benefit would have been, if the life insurance policy was used post mortem. It bears repeating that viatical settlements are only available to policyholders who have a life expectancy of 24 months or less, but those with more time have the option of settling their policy through a life settlement instead.
Ultimately, there are only really two viable options for settling life insurance policies outside of the policy’s framework, and still receiving a high valued lump-sum payment. Viatical settlements grow in value depending on the decline of an insured person’s life expectancy. Though it is a morbid connection, a viatical will be worth less in an investor’s return, if the seller (or “viator”) lives longer.
A life settlement is therefore the only other option, (besides closing the policy with the insurance company). These closely follow the definition of a viatical settlement, with one major difference in criteria. The seller of the life insurance does not have the limitation of life expectancy. A life settlement means that the insurance can be sold by any policy holder, at any time and still receive the lump-sum payment.
Reasons to Sell a Policy
However, with so few Americans having a plan in place in the event of untimely passing, it begs the question of why would you want to sell your life insurance policy. Well, for life settlements, this lump sum payment can be used for home renovations, college funds, down payments on a house—anything that requires a large transactional fee quickly. It is recommended that all other options are explored before a life settlement is pursued.
A viatical transaction is a different story. With medical care costing more, and pre-paid funerals costing less, many people are looking to sell their policies in order to enjoy a more dignified or peaceful transition in their final days. As such, viatical brokers don’t care what the money is spent on—whether that be care, home conversion for comfort or simply an RV to travel across the country. The proceeds of the sale are the business of the seller, and the seller only.