A “viator” is an individual diagnosed with a terminal or life-threatening illness who opts to sell their life insurance policy. This transaction, often termed a viatical settlement, allows the viator to obtain immediate cash in exchange for transferring ownership and beneficiary rights of their life insurance policy to a third party.
How Viatical Settlements Work
A viatical settlement involves several key steps:
Diagnosis
The process begins with the individual (viator) receiving a diagnosis of a terminal or life-threatening illness. Typically, life expectancy is less than two years.
Policy Appraisal
The life insurance policy owned by the viator is appraised to determine its fair market value. This appraisal considers several factors including the face value of the policy, premiums, and life expectancy of the viator.
Offer and Acceptance
After the appraisal, a viatical settlement provider makes an offer to the viator. If the offer is accepted, the viator agrees to sell the policy for a sum less than its face value but more than its cash surrender value.
Transfer of Policy
Upon acceptance, the ownership and beneficiary rights of the life insurance policy are transferred to the viatical settlement provider or investor. The investor assumes responsibility for paying any future premiums.
Payout of Benefits
When the viator passes away, the investor receives the death benefit from the insurance policy.
Example of a Viator in Action
Consider John, a 55-year-old diagnosed with terminal cancer. John holds a $500,000 life insurance policy. Facing mounting medical bills and wanting to enjoy his remaining life, John decides to opt for a viatical settlement. After an appraisal, a viatical settlement provider offers John $300,000. John accepts, receiving immediate cash which he uses for medical expenses and personal enjoyment. After John’s passing, the investor receives the $500,000 death benefit.
Special Considerations
Tax Implications
The proceeds from viatical settlements are generally tax-free when the viator is terminally ill, as per IRS guidelines.
Regulation
Viatical settlements are regulated to protect viators from exploitation. These regulations vary by state and include licensing of viatical settlement providers and mandatory disclosures to the viator.
Ethical Considerations
Ethical concerns arise from the notion of investors benefiting from a person’s impending death. However, viatical settlements provide financial relief to individuals in dire need.
Related Terms
- Life Insurance: A contract between an insurer and a policyholder where the insurer guarantees payment of a death benefit to named beneficiaries.
- Living Benefits: Provisions in life insurance policies that allow the policyholder to receive benefits while still alive under certain conditions.
- Terminal Illness: A disease that cannot be cured and is likely to lead to the individual’s death within a short period.
- Viatical Settlement Provider: A company or individual that purchases life insurance policies from policyholders diagnosed with a terminal illness.
Frequently Asked Questions
Is the process of selling a life insurance policy as a viator complicated?
While the process can be complex, involving appraisals and legal formalities, it is structured to ensure clarity and fairness.
Are there alternatives to viatical settlements for terminally ill individuals needing funds?
Yes, alternatives include utilizing living benefits from the existing life insurance policy or seeking accelerated death benefits.
Summary
A viator is an individual diagnosed with a terminal illness who sells their life insurance policy for immediate cash benefits. The practice of viatical settlements aids in providing financial relief during critical times but comes with several legal, tax, and ethical considerations. Understanding these nuances ensures informed decision-making for those facing severe health challenges.
