The What, Why, and How of Viatical Settlements

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May 3, 2019
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When you’re seriously ill, life can become difficult. In addition to the personal trauma of illness and the physical symptoms that you’re dealing with, you have to worry about money. Tragically, health care costs are very high in our country — so high, in fact, that they cause many bankruptcies. That’s not what you want for your family. You care about your loved ones, which is why you have been paying into a life insurance policy. Now you’re afraid that your medical needs will rob them of their wealth. So what can you do?

One option is a viatical settlement. Below, we’ll lay out what a viatical settlement is, when and why you should consider it, and how it could benefit you and your loved ones in the long run.

What is a viatical settlement?

So what, exactly, is a viatical settlement?

A viatical settlement is an option for folks who have life insurance policies and are seriously ill. A viatical settlement allows policyholders to exchange their eventual insurance policy payout for cash up-front. In essence, you’ll be selling your life insurance settlement before you get it.

Naturally, you’ll be getting a bit less than your eventual payment would be worth — that’s why this makes sense for the folks on the other side of this transaction. As for why you would want to cut this deal, that brings us to our next section.

Why should you consider a viatical settlement?

A viatical settlement isn’t something that’s available to everyone. It’s designed to be of use to people who are seriously ill. When you’re very ill, medical bills can be mounting faster than you can pay them off. A viatical settlement is an answer to this dilemma: It can give you an influx of cash now, when you need it.

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The why of a viatical settlement, then, is that you are sick and need cash. But it’s also important to understand how a viatical settlement can help you in the long run. After all, when you invest in a life insurance policy, the plan is pretty straightforward: After you’re gone, your family will receive money from the life insurance provider that will help them handle things like funeral expenses and do things like replace your regular income. It’s a safety net that you want for them — so how does it help to swap something like that for cash now? Won’t the missing money hurt later on?

Not as much as the debt can hurt you by then. Let’s explore the math.

How a viatical settlement could help you and your family in the long run

If you weren’t dealing with any big expenses, you would have no reason to exchange your life insurance payout for cash now. But you are, and the fact of the matter is that, in some cases, the math can work out such that a viatical settlement is actually much better for your family in the long run.

Let’s return to the situation in question: Viatical settlements are for seriously ill people. Medical bills are mounting. It’s hard to make ends meet. If you choose to skip the settlement so that your family gets the life insurance payout later, you’ll have to figure out how to do things like pay your credit card bill and keep up with your car payments. Fail to do that, and you may find yourself losing valuable assets (through repossession, for instance) and trapped in the cycle of debt (in which loans are taken out to pay other loans, interest devours your free cash, and the principal amount of loans never go down).

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If this sort of stuff happens, your family could be deep in debt by the time that you pass away. Then they’ll get the life insurance payout — but will it be enough? By then, things may have gone too far.

The reason viatical settlements work, then, is because they allow you to knock out debt before it can grow. In this sense, money now can be worth more than money later. In the same way that investing can grow your wealth at an incredible pace, debt — in which interest and compound interest work against you, instead of for you — can mount insanely fast. Knocking it out now can be by far the better financial choice for your family, and a viatical settlement can be the best way to do that. Speak to a financial advisor to learn more.