Life insurance offers a safety net to protect your family’s financial future.
But as they age, many seniors discover that life insurance policies have outlived their usefulness. For example, you might have investments or other insurance policies that provide enough coverage for your retirement. Or, you may encounter unexpected home, medical or family expenses that are more than you can immediately afford.
Selling your insurance policy is one solution. What surprises many seniors, however, is the fact that they can sell their policy in more than one way. Two of the most common are life settlements and viatical settlements. And the difference is in more than just the definitions — it’s about finding which viatical and life insurance settlement options for seniors best match your situation and provide the best value for your policy.
In our life settlement or viatical guide, we’ll offer practical advice to help you make the call.
UNDERSTANDING THE CORE DIFFERENCE BETWEEN LIFE SETTLEMENTS AND VIATICAL SETTLEMENTS
Both life settlements and viatical settlements unlock some of the cash value in your policy and provide a lump-sum payment, but they serve different purposes.
Life settlements are a popular choice for seniors 65 and over who have unwanted or underperforming policies. Viatical settlements are for policyholders with a terminal illness, regardless of their age. Generally speaking, viatical settlements are only available to those with a life expectancy of two years or less.
Want more details on the differences and choosing between life settlement and viatical? We’ve got you covered.
WHO TYPICALLY CHOOSES A LIFE SETTLEMENT?
Seniors who no longer need coverage for their estate or dependents may choose a life settlement. This is a common scenario for seniors with adult children who have their own lives, jobs and life insurance policies.
You may also choose a life settlement if your premiums have become too expensive. Seniors on a fixed income often struggle to afford premiums, especially given the rising cost of utilities, food and other necessities. Another reason to choose a life insurance settlement is if you need extra money for your retirement goals or healthcare needs.
Here’s an example:
Ed is 72 years old. He’s in good health, and his kids are financially stable. He and his wife, Joyce, want to travel the world while they’re still healthy, but their current retirement income isn’t enough. Ed chooses a life settlement to get a lump sum for his policy that is significantly more than the cash surrender value, giving the couple the cash flow they need to get out and see the world.
WHO TYPICALLY CHOOSES A VIATICAL SETTLEMENT?
Viatical settlements are only available to individuals with a terminal diagnosis and a life expectancy of two years or less. While these individuals could also choose a life settlement, viatical settlements typically offer a higher payout due to shortened life expectancy. Families who need immediate cash for medical bills or end-of-life care may choose a viatical settlement.
Consider Nancy, who is 65 years old but has an advanced form of cancer. Her life expectancy is estimated at one year, and with treatment, she can have a good quality of life for her last 12 months. This treatment is expensive, however, so she chooses a viatical settlement to help cover the cost.
VIATICAL VS. LIFE SETTLEMENT DECISION FACTORS
Multiple factors play a role in the decision between viatical and life settlements, including:
- Current health status: If you are in good health, you can choose a life settlement once you’re over 65. If you have a terminal illness, you can choose a viatical settlement at any age or a life settlement if you’re 65 or older.
- Financial timeline: Consider your financial timeline. If you’re putting away money for long-term plans and potential needs, a life insurance settlement is a good choice. If you have urgent medical needs, you may opt for a viatical settlement.
- Policy structure: In general, you can receive a life settlement if you are 65 or older and have a life insurance policy with a death benefit of $100,000 or more. Whole, universal and permanent polices are eligible, while term policies are not, unless they can be converted. Life settlements typically pay four to seven times more than the value of a cash surrender. You can receive a viatical settlement at any age if you have a terminal illness and have less than two years left to live. Payouts are often higher than life settlements because the purchaser of the policy will receive the benefit sooner rather than later.
- Impact on beneficiaries: In both cases, a settlement means you are selling your death benefit to a third party. This means your beneficiaries will no longer receive the benefit when you pass away. As a result, it’s worth considering the financial impact on your family before making a decision.
- Tax differences: Life settlements are typically taxable, while viatical settlements are tax-free if the policyholder passes away within two years of the sale.
- Emotional concerns: Selling a policy can be an emotional decision, especially if you are dealing with a terminal illness vs. simple retirement concerns. As a result, it’s worth taking some time after you receive settlement offers to ensure the choice is best for you and your family.
- Practical considerations: Both immediate needs and legacy goals play a role in your settlement decision. Consider the short- and long-term impacts of selling your policy before committing to any course of action.
NEXT STEPS FOR POLICYHOLDERS
If you’re considering a life settlement or viatical settlement, there are several steps to follow. Thankfully, they’re the same for both.
- 1. Use an eligibility calculator. Start with an eligibility calculator to see if you qualify for a life settlement, viatical settlement or both options.
- 2. Get a policy valuation. Speak to a life settlement advisor to get a valuation of your policy in the current market, both for life and viatical settlements.
- 3. Consult with a licensed settlement broker and tax advisor. Speak to a licensed settlement broker to secure multiple offers for your policy. It’s also worth talking to a tax advisor to help navigate any immediate and long- term tax requirements.
- 4. Compare offers and weigh the outcomes. Compare the offers you have received and weigh the outcomes, both financial and personal. For example, while a viatical settlement means you will no longer have an insurance death benefit, the payout could help you live the rest of your life comfortably.
FINDING THE BEST SETTLEMENT OPTION FOR YOUR NEEDS
What’s better — life settlement or viatical settlement?
There is no “right” choice when it comes to insurance settlements. In some cases, it makes more sense to choose a life settlement, while in others, a viatical settlement offers better value. In practice, your best option depends on your age, health, current financial circumstances and financial goals.
Not sure which settlement type fits your needs? The right guidance can help turn your policy into financial peace of mind.
