Finding ways to fund retirement, pay mounting medical expenses, or to just have enough money to live comfortably can become more challenging as we age. Raising cash by selling assets that are no longer needed is one option - and that includes your life insurance policy. Life settlements and viatical settlements are transactions that involve selling your life insurance policy to another party. You will get a lump sum of cash in return, and the purchaser (often an investment firm) takes over your premium payments and becomes the beneficiary.
There are many similarities between a life settlement and a viatical settlement - including that there are no restrictions regarding how you spend the money after the sale is completed and that you no longer will be covered by life insurance (unless you do a Retained Death Benefit Life Settlement). There also are some very important distinctions between the two.
What Is a Life Settlement?
A life settlement is the sale of an existing life insurance policy to another party. Sellers typically are individuals who are at least 70 years old and have a policy they no longer want, with a face amount (death benefit) of at least $100,000. Several types of policies can qualify for life settlements - including universal life, whole life, variable life, term, and joint survivorship policies.
The policy is sold for an amount that is more than if the policy were simply surrendered for its current cash value - often significantly more - but less than its death benefit. Factors such as the face amount of the policy, the cost of premiums, and your current health status all go into determining the settlement amount.
The reasons for selling vary by individual. Premiums could have become too expensive, a seller might just want cash, or there may no longer be a need for the beneficiary to rely on the death benefit.
What Is a Viatical Settlement?
What does "Viatical Settlement" mean? Some people use the terms "Viatical Settlement" and "Life Settlement" interchangeably. There are even states that use "Viatical Settlement" as the legal term to refer to all life settlements.
Traditionally, however, a viatical settlement is the sale of an existing life insurance policy when the insured is terminally ill, typically with only 24 months or less to live. An individual facing this circumstance may ask, "What is a Viatical Settlement transaction going to do for me?" While the settlement amount again would be less than the death benefit, it could be hundreds of thousands of dollars. Insureds may opt for a lump sum to enjoy their remaining time or to pay off medical bills so that family members will not have to carry that burden.
Another important difference between life settlement and viatical settlements is that money received for viatical settlements is not counted as capital gains and thus is not subject to taxation. Money received from a life settlement, on the other hand, may be taxed at varying rates depending on how much has been spent on premiums, as well as other factors.
State laws govern viatical and life settlements, so the definitions of these terms may vary by state.
What Happens Under a Viatical Settlement or Life Settlement?
Both types of transactions involve the same basic steps. If you are considering selling your life insurance policy, it's wise to use an experienced life settlement broker with a well-established network of life settlement providers. That way, your policy will be shopped among the most potential buyers, increasing the opportunity for you to realize the biggest payment possible. The process typically includes the following key steps:
Contact a life settlement broker
You contact a life settlement broker for an initial conversation regarding your personal circumstances. (Or you can have your insurance agent or financial advisor contact a broker.)
You complete an application that includes information about your policy and your health history.
Your broker will shop your policy among its network of life settlement providers/buyers and obtain offers.
If you accept an offer, the sales proceeds are placed in escrow until your insurance company transfers the ownership and beneficiary of the policy. After these changes are completed, you will receive the sales proceeds.
How IMS Settlements Can Help
IMS Settlements can help you determine whether a life settlement is an appropriate option for you - and ensure that you receive the most money possible for your policy. We've been helping both financial professionals and life insurance policy holders across the country maximize the value of their existing policies for years. For a free evaluation of your policy and more information about how we can help you, contact us today.
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