We are often asked about viatical settlements here at QuickQuote. This is a rapidly growing business that is related to the life insurance industry. I say ‘related’ because viatical settlements are not life insurance products; however, they do have a significant impact on the life insurance industry.
Viatical companies make money by purchasing life insurance policies from people with serious or even terminal illness, or from the elderly. The company typically pays the policy owner a price that is higher than the surrender value of the policy but lower than the death benefit. With this arrangement, a terminally ill or elderly policy owner can make more money by selling to a viatical company than they would be cashing in their policy. Also, the viatical company makes a profit because they receive the death benefit when the insured dies; an amount that is higher than they paid for the policy.
The viatical company must also pay the premiums on the policy until the insured dies. Therefore, they will be more interested in purchasing policies on the lives of individuals with short life expectancies.
Policy owners need to consider that while viatical settlements can provide much-needed cash, the money they receive from the sale is likely to be considered taxable, while most death benefit payments are not. Also, many insurance companies will advance a portion of the death benefit proceeds to a policy owner if the insured is diagnosed as terminally ill. This is typically done through a policy’s accelerated death benefits feature.