What You May Not Know About Viatical Settlements

Published March 27, 2019

Viatical settlements have been around since the mid-1980s, when AIDS patients with large life insurance policies started selling them to private investors and life settlement companies. These transactions have since moved into a mainstream industry that is becoming increasingly regulated and organized.

The first viatical settlements were often unwieldy arrangements that were very expensive and differed widely from one transaction to the next. Viatical settlements today are much more streamlined and can be done in as soon as a week in some cases, in contrast to the months that it often took to fund when they first appeared.

Companies such as Mason Finance are in the business of funding viatical settlements and other types of life settlements. Here is a full guide to viatical settlements that you can review for more information on how they offer this transaction.

In many cases, viatical settlements are considered to be securities by state laws, and thus require that those who sell them carry a securities license.

The taxation of viatical settlements is somewhat murky, and each state has its own specific laws governing how they are reported.

* Viatical settlements are generally excluded from income tax at the federal level, but the IRS has a boilerplate set of requirements that must be followed in order to receive this tax treatment. The policy owner must be either terminally or chronically ill, and have a life expectancy of two years or less.

* In many cases, the policy owner also can only sell the policy to a licensed viatical settlement provider in the same state (but some states do not require this).

* Finally, the viatical settlement provider must be in the business of purchasing life insurance policies on a regular basis and abide by the rules set forth in the Viatical Settlements Agreement Act.

There are several common myths regarding viatical settlements in addition to the general misconceptions about its tax treatment. A list of these include:

* A terminally ill policy owner should always viaticate – Viatical settlements should generally be used when all other sources of funds have been exhausted. This should not be your first option if you need cash to pay for medical expenses, but rather your last.

* A viatical settlement always pays more than an accelerated death benefit – In reality, most accelerated death benefits pay considerably more than the average viatical settlement. An accelerated benefit rider will pay the insured a portion of the death benefit while the insured is alive to cover medical or other expenses. This rider often comes at no cost within the policy.

* The insurance company will restrict the use of funds from an accelerated benefit rider – This is not only untrue, but state laws specifically prevent insurance companies from doing this.

* Viatical settlement providers can provide payouts of up to 80-85% of the life insurance policy’s death benefit – These claims are almost always greatly exaggerated, and the actual payout will depend on a host of factors, such as the size of the policy, the insured’s health and projected longevity, the financial strength of the insurer and the type of life insurance policy in question (i.e. term, universal, etc.).

* All viatical settlement companies will offer the same payout for a given policy – Any prospective insured should get quotes from at least 6 different companies to get a clear idea of what their policy may be worth. Viatical settlement companies will try to outbid each other in order to get your business, so be sure to negotiate with them to get the best deal possible.

* Viatical settlements are humanitarian – Companies that offer viatical settlements are in business to make as much money as possible in each transaction. They offer high returns on capital to investors, but this only comes by reducing the payout to the insureds.

* Viatical settlements are as safe as CDs – The viatical industry lacks regulation at both the federal and state levels, and they do not fall under the jurisdiction of the SEC or FINRA. It has been estimated that hundreds of millions of dollars have been lost in viatical scams. Viatical settlements come with several types of risk, and the industry is rife with instances of malpractice and fraud.

* Viatical settlements provide guaranteed returns – The actual return that is earned on any viatical settlement is wholly dependent upon the lifespan of the insured. If the insured has a life expectancy of one year but lives for another 5 years, then the return posted by the settlement is substantially reduced.

* You can invest your IRA money in viatical settlements – The IRS has made it clear that no form of life insurance may be purchased with IRA money. To do so would make the entire amount invested count as taxable income.

Viatical settlements should be approached with caution. While they can provide insureds who have no other assets to draw from with cash up front, they should generally only be used as a last resort. Consult your financial advisor for more information on these settlements and whether one is right for you.