Disadvantages of Viatical or Life Settlement (Sale of an Unwanted Life Insurance Policy)

Unless otherwise noted below, viatical and life settlements share many of the same disadvantages:

  • Reduced total payout for dependent spouse and children – once the policy is sold, it will no longer pay a tax-free death benefit to the insured’s surviving spouse and children. Thus, the primary disadvantage of a viatical or life settlement is that the surviving spouse and children are deprived of the death proceeds and instead only have whatever lump-sum sale proceeds remain unspent at the insured’s death. This may make a viatical or life settlement inappropriate in situations where there are not sufficient other assets to provide for the surviving spouse and children. In addition, with a life settlement the total payment may be even more reduced because of the fact that a portion of the life settlement proceeds may be income taxable (see discussion in “Tax Implications” later).
  • May impact eligibility for governmental assistance programs – the receipt of the lump-sum sale proceeds from a viatical or life settlement could jeopardize the eligibility of an insured who is receiving benefits from a needs based governmental assistance program.
  • May expose life insurance proceeds to creditors – when life insurance death proceeds are paid to a designated beneficiary, most states exempt them from the claims of the insured/deceased’s creditors. Once these proceeds are paid to a living insured, however, the insured’s creditors may be able to reach them, unless state law has extended creditor protection to viatical or life settlements.
  • Settlement offers can vary considerably – unless the policy owner does a good job of comparison shopping, he or she may not receive a fair amount for the policy.
  • Not all policies qualify – for both viatical and life settlements the policies generally must be at least two years old (i.e., beyond the incontestable and suicide periods).
  • Very few insureds generally qualify – viatical settlements are only available to those with terminal or seriously chronic illnesses. Although there are many people who would benefit from selling their unneeded policies for more cash than they could receive from surrendering the policies, in practice, life settlements are generally only available for those age seventy or older (i.e., those with life expectancies not exceeding eleven to fifteen years). The percentage of life settlement offers that exceed the existing cash value is relatively low in comparison to the number of policies shopped for a life settlement.
  • No control over the ultimate owner of the policy – once the policy is sold as part of a viatical or life settlement, the insured has no control over who ultimately owns the policy and who would benefit from the insured’s death.
  • Reduces overall life insurance capacity and ability to obtain new coverage – life insurance capacity is the maximum amount of coverage that the insurance industry is willing to issue to a specific insured. A policy that is sold to a life settlement company remains in force and counts against the total amount of coverage that the insured financially qualifies for. If the insured’s needs later change and the insured desires to obtain new coverage, he or she may find that there is little to no insurance capacity left and they will be unable to get new life insurance.
Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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