Within the past two decades, having a life insurance policy has become quite a trend that has more people investing in it daily. People view it as a powerful asset and therefore, pay a chunk of their earnings in the form of premiums. However, the only complaint most people have is- a life insurance policy is a definite asset, but cannot be liquidated. Under circumstances when you need instant cash while you go through a financial situation, your policy becomes a big asset and yet, may seem inaccessible.
The life and viatical settlement industry have changed people’s minds about their policies being an inaccessible asset. Since the past decade, life settlements and viatical settlements have become a little more prominent, if not popular and trending. We talk about two kinds of settlements to cash in life insurance while still alive, so this also creates much confusion in people. Both viatical settlements and life settlements are two kinds of settlements for the policy, with some differences here and there.
Understanding both kinds of settlements will give you an insight into which one you might need. With that being said, here’s everything you need to know about life settlements and viatical settlements.
A life settlement is a transaction between a policyholder and a third party, wherein the policy is sold for cash. While the cash value in a life settlement is higher than the surrender value of the policy, it’s less than the death benefit.
In order for a person to be able to cash in life insurance while still alive in the form of a life settlement, they should be above the age of 65 and should have a life expectancy of more than 2 years. However, a lower life expectancy (over 2 years, however) can get them more cash.
People generally sell their policy in exchange for a life settlement when they can no longer meet the rising costs of the premiums. Since the premium value keeps increasing with time, when a policyholder grows older, the premium value can be significantly high. Life settlement is becoming a popular alternative to surrendering the policy because that can get you more cash than surrendering the policy altogether.
Besides high premium costs, people also seek a life settlement when they need instant cash for urgent needs. The cash you get from selling your life insurance policy in the form of a life settlement can also help you take care of your expenses after retirement.
Viatical settlements are pretty much like life settlements, wherein the policyholder sells his policy in exchange for cash. However, the biggest difference between a life settlement and a viatical settlement is that the eligibility criteria to qualify for a viatical settlement is having a life expectancy of fewer than 2 years. The broker or licensed life settlement provider figures out the life expectancy through medical reports and your medical history.
Viatical settlements are for people who have a terminal illness that results in a life expectancy of fewer than 2 years. Usually, when you sell your policy for a viatical settlement, you get half the amount of the death benefit of your policy. Also, if you’re older, you may get a higher cash value based on your age. When viatical settlements are sought by people who are terminally ill, the lump sum cash they get is not taxable.
Viatical settlements prove to be useful for people who need to handle medical expenses when they are diagnosed with a terminal illness. Being diagnosed with a terminal illness also proves to be a critical financial stage when the patient would no longer be able to afford the premiums. Thus, in this light, a viatical settlement becomes the ideal alternative.
When you decide to cash in life insurance while still alive in return for a life settlement or viatical settlement, there are two types of agencies that can help you through the process. While brokers are an independent party that acts as mediators between the policyholder and the buyer, licensed life settlement providers may also be the ultimate buyer of your policy.
Most people opt for a licensed life settlement provider because of the trust factor and not having to pay a commission that brokers usually demand. Both life settlements and viatical settlements are viable options based on which one is appropriate for a policyholder. As the industry grows in popularity, we can expect more explicit information about the cash value and specifications of each type of settlement.