Viatical Settlements Text Size:

When you're terminally ill, it can be very tempting to sell your life insurance policy proceeds to fund medical treatments and support your family. But viatical settlements are complicated, and should be thoroughly investigated.

In a viatical settlement the consumer (called a "viator") sells his or her life insurance policy to a viatical settlement company (called a "provider") for a lump sum payment that is a percentage of the policy's face value. The viatical provider then becomes the beneficiary of the policy, and is responsible for making the premium payments. When the viator dies, the viatical provider collects the full face value of the policy.

Viatical settlements are regulated by each state's insurance departments (link). State regulations and laws vary widely (link), but most require viatical brokers and providers to be licensed. A broker will "shop" your policy to several potential providers, looking for the best deal.

The value of an individual insurance policy is based on the:

• Age and medical condition of the viator
• Financial rating of the insurance company
• Type of insurance policy
• Amount of the premiums
• How often premiums must be paid
• Overall economic conditions

The Health Insurance Portability and Accountability Act ("HIPAA") makes the proceeds of viatical settlements for the terminally or chronically ill tax-free up to the amount paid in premiums during the life of the policy. The Act defines "terminally ill" as having been "diagnosed by a certified physician to have a life expectancy of under 24 months." You're considered "chronically ill" under the Act if you are "permanently and severely disabled by an illness."

Disadvantages

Receiving a lump sum cash settlement can make you more vulnerable to creditors who already have outstanding judgments against you.

Cashing in your life insurance policy can also affect your eligibility for public assistance programs, such as:

• Medicaid
• Supplemental social security income
• AFDC (Aid to Families With Dependent Children)
• Other supplemental programs, such as drug purchase assistance programs

Cashing in the death benefits under your insurance policy may also impact on insurance benefits for other family members, so it's a good idea to read your policy carefully and make sure you understand all the consequences of making a viatical settlement.

Due to the potential legal, tax and other financial considerations, it's important to consult a lawyer and tax advisor before making a viatical settlement.

The Settlement Process

Viatical settlement providers require detailed information about your policy and health status in order to make an informed decision. You'll need to provide:

• A copy of your insurance policy
• Up-to-date and complete medical records
• Medical information release forms to allow the viatical broker or provider to contact your medical providers for additional information as to your diagnosis and prognosis
• Information about how long you've had the policy, the premium amounts and the frequency of premium payments

Your viatical broker will review the information and ask an independent medical expert to assess your medical condition and life expectancy.

The broker will then send all the information to various viatical providers who buy insurance policies as a business. Each provider will assess all the information and make an offer, which will be a percentage of the face value of the policy.

Your viatical broker will then relay the best offer to you, and perhaps give you an idea of the range of lower offers as a point of comparison.

If you accept the offer, you'll be asked to sign legal documents, including:

• A Purchase and Sale Agreement
• Life insurance policy change forms
• Beneficiary Waivers

You can expect payment within days of closing the sales transaction.

If you change your mind after signing the legal paperwork, you can "rescind" (cancel) the contract within 15 calendar days (30 days in some states) of receiving payment. The Purchase and Sale Agreement you signed details the process you must go through to rescind the contract.

If you have a bad experience with a viatical settlement broker or provider, contact your state's Department of Insurance (link) to file a complaint.