Ever heard of a "Viatical Settlement?"
No, this isn't a religious commune, it's an insurance benefit that
many people have never heard of. A viatical settlement is, simply stated, a
method for an insured person with an abbreviated life expectancy to "cash out"
of a life insurance policy, prior to death. Stated another way, it is a "living
benefit" or lifetime settlement option. In technical terms, this procedure is
the sale of an insured's life insurance policy death benefits to a third party
in consideration for an immediate cash payment. Viatical settlements were first
implemented around 1989.
If you are terminally ill, you can assign your Federal Employees' Group Life Insurance
(FEGLI) coverage to a viatical settlement firm in exchange for cash.
Some viatical firms also accept assignments if you are chronically ill. While
living benefits payments come from your life insurance fund (part of the U.S
Treasury), viatical settlement firms are private firms not connected with the
Federal government.
A viatical settlement allows you to invest in another person's
life insurance policy. With a viatical settlement, you purchase the policy (or
part of it) at a price that is less than the death benefit of the policy. When
the seller dies, you collect the death benefit.
Your return depends upon the seller's life expectancy and the
actual date he or she dies. If the seller dies before the estimated life
expectancy, you may receive a higher return. But if the seller lives longer than
expected, your return will be lower. You can even lose part of your principal
investment if the person lives long enough so that you have to pay additional
premiums to maintain the policy.
Viatical settlements can be risky investments. For these reasons,
you should exercise caution and thoroughly investigate before you
consider investing in a viatical settlement.
Many state insurance commissioners license the companies that buy
viatical settlement to sell to investors and may have information about a
specific company or viatical settlements in general. To find out who your state
insurance regulator is, please visit the website of the National
Association of Insurance Commissioners. The Federal Trade Commission also has information for those who are
considering selling their life insurance policies.
It is important to weigh the relative risks of
different investments before making the investment decision that is most
appropriate for you. Some investors have cashed in relatively safe, but low
paying annuities, only to find the high paying viatical investment that they
purchased was in fact too good to be true. They then have faced the possibility
of losing their entire investment. In some cases, investors have compounded this
problem due to the fact that they had to pay a penalty for cashing in an annuity
early and pay income taxes on a portion of the distribution. While investing in
viatical settlements can be a profitable venture, make sure that you have done
all that you can to ensure that you understand the viatical investment product
and the risks associated with it.
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