Tips on selling your life insurance policy: Understanding viaticals and life settlements

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People living with a terminal illness often face very tough financial choices. A viatical settlement is one option that can give you cash to help with expenses.

A viatical settlement is the sale of a life insurance policy to a third party. The owner of the policy sells it for a percent of the death benefit. The buyer becomes the new owner and/or beneficiary of the life insurance policy, pays all future premiums and collects the entire death benefit when the insured dies.

In a similar fashion, a life settlement may provide an attractive option for a healthy policyholder who no longer wishes to pay the premium on a policy, to stop paying premium and get more money than the surrender value of the policy. In a life settlement, the insured is re-underwritten, and an offer made for the policy based on their current life expectancy. This offer can be more than the surrender value.

Selling your life insurance policy may or may not be the right choice for you. The following tips are provided by the National Association of Insurance Commissioners.

Know your options

Before you enter into any viatical or life settlement transaction, you should:

Contact your insurance agent or company for information about settlements.
Consult your own financial advisor, who knows your personal financial needs.
Contact your state insurance department for information about current laws.

Consider all your options

Find out if you have any cash value in your life insurance policy. You may be able to use some of the cash value to meet your immediate needs and keep your policy in force for your beneficiaries. You may also be able to use the cash value as security for a loan from a financial institution.
Find out if your life insurance policy has an accelerated death benefits provision. It could pay you a substantial portion of your policy’s death benefit and you wouldn’t have to sell your policy to a third party.

Other considerations

Contact a professional tax advisor. Find out the tax implications. Not all proceeds are tax-free.
Know that the proceeds are subject to the claims of any creditors.
Find out whether receipt of a cash settlement will cause you to lose any public assistance benefits such as food stamps or Medicaid.
Know that you must provide certain medical and personal information.

Consumer tips

Understand how the process works and when the phases will happen.
Decide whether to sell your policy directly to a life or viatical settlement provider or go through a settlement broker who will do the comparison shopping for you.
If you don’t use a settlement broker, comparison shop on your own.
You don’t have to accept any life or viatical settlement offer
Check all application forms for accuracy, especially information about your medical history.
You must be truthful in your answers to application questions.
Make sure the settlement provider agrees to put your settlement proceeds in escrow with an independent party or financial institution to make sure your funds are safe during the transfer.
Find out if you have the right to change your mind about the settlement after you get the proceeds. If you have that right, you’ll have to return the money you were paid and the premiums the buyer paid. In many states, you have only a certain period of time to change your mind.
Understand what information a buyer must know about you to buy your policy, and who else might get that information, before you provide the information.

Defining the terms

The person selling the life insurance policy is the viator. He or she will get money from the settlement. This person gives up ownership of the policy in return for cash now. The viator generally has a terminal illness.

A life or viatical settlement provider is the person or company that buys the life insurance policy. The buyer becomes the policy owner, must pay any premiums that are due, and, eventually, will collect the entire death benefit from the insurance company.

The person or company who represents the seller and can “shop” for offers is a settlement broker. Remember — the broker gets paid and this will reduce the amount of proceeds you receive.

An Accelerated Death Benefit (ADB) is a feature of a life insurance policy that typically pays some or all of the policy’s death benefit before the insured dies. It may be another way to get cash from a policy without selling it to a third party. Check with your agent or insurance company to see if your policy has this benefit.

Questions to consider

Do I still need life insurance protection?
If I sell my policy, how do they decide how much cash I get?
Is this an employer or other group policy? If so, do I need their permission to sell it?
If I sell my policy, who will be the legal owner?
Do I need the advice of a tax or estate planning advisor before I decide to sell my policy?
Will investors have specific information about me, my family or my health status?
Is the broker or company I plan to sell to allowed to do business in my state?
After I sell my policy, can it be resold by the buyer?

Consumer alert

If you’re asked to invest in or buy a viatical or life settlement, we recommend you contact your state insurance department. Learn more about the issues and risks
If you’re interested in selling your life insurance policy, you should contact your state insurance department to get more information
If you’ve been contacted by someone who wants you to buy a policy and then sell it immediately, you should contact your state insurance department. It’s possible you’re being targeted to participate in fraud.

Check with your state

Your state insurance department may regulate viatical and life settlement transactions. Contact your state insurance department for a copy of those regulations. To find contact information, choose your state from the menu at the top of the page.

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Penny Gusner

Contributor

Penny is an expert on insurance procedures, rates, policies and claims. She has extensive knowledge of all major insurance lines -- auto, homeowners, life and health insurance. She has been answering consumers’ questions as an analyst for more than 15 years and has been featured in numerous major media outlets, including the Washington Post and Kiplinger’s.