Viatical settlements have developed as an alternative to traditional life insurance policy options. When life insurance policies are no longer wanted or needed, instead of paying a penalty for cashing in the policy or simply forfeiting the money paid into premiums, the policy owner can consider a viatical settlement. This type of settlement allows a policy owner to receive the entirety of the death benefit themselves while they are alive, and to assign the beneficiary rights of their policy to a third party.

The money received through a viatical settlement could be used to pay off debts or other necessary expenses before the insurer passes away. Viatical settlements are increasingly becoming popular options with terminally ill policy holders as they provide a chance to enjoy the benefits of the policy while they can still be alive to do so. They can also unlock money that would be thought to be lost and result in a much better return-on-investment than simply cashing out a life insurance policy.

The process for setting up a viatical settlement requires the policy holder to be approved for the transfer. The policy holder must provide medical documentation, such as recent medical statement or a ‘letter of diagnosis’ from their doctor, to an insurance company or broker who can assess the life expectancy of the policy holder and provide estimates on the death benefit. Once the life expectancy is determined, a viatical settlement can be set up with a third-party investor.

Viatical settlements are legal in all U.S. states, and offer financial benefits for policy holders with a short life expectancy, but involve unknown risks for the investor. The policy holder must be aware that in order to receive a lump sum of money, they are trading away part of the face value of their policy in exchange for the one-time payment. Investors must also be aware that the rate of return in a viatical settlement depends upon when the insured dies and may not expect a comeback of their investment.

Viatical settlements are evolving as an option that can unlock money from life insurance policies that would otherwise be lost. Both the policy holder and the investor must understand the risks associated with the transaction and make an educated decision on whether the settlement is right for them.