Staring down one’s mortality is rarely a pleasant experience. But it can get a lot more unpleasant when you’re also dealing with the stress and uncertainty of steep medical bills. That’s the reality for many Americans, unfortunately. Medical bills are pricey here, and not everyone has a financial safety net capable of keeping them afloat when their health goes south.
But there’s a payout that grows much closer when you get seriously ill: your life insurance settlement. If you’ve been paying into a life insurance plan over the years, then your beneficiaries stand to receive a sizeable sum when you die. That was the point all along, of course, but it’s also frustrating. Your life insurance policy is so valuable now, yet that money won’t arrive until after you’re gone. By then, your medical bills may have eaten away at the estate you had hoped to leave to your heirs, and little will be left besides the life insurance money.
This situation is why some financial whiz came up with viatical settlements.
What is a viatical settlement?
The idea of a viatical settlement is pretty simple: You sell your life insurance policy for cash.
You probably know that companies out there buy structured settlements and annuities, offering cash upfront in exchange for the long-term income. The same thing happens with life insurance plans. If you take a viatical settlement, you’ll give up your future life insurance payout in exchange for much-needed cash now.
But is that good or bad? Well, it all depends.
The bad things about a viatical settlement
So what are the downsides to a viatical settlement? One is obvious: You’ll lose your eventual life insurance payout. That’s money your heirs could use to pay for funeral expenses and other pricey things. Of course, the deal might have a net financial advantage for your heirs and beneficiaries, as we’ll explore in the next section.
The trick with a viatical settlement is that you’ll get a bit less money than your policy will eventually pay out. Obviously, this whole idea wouldn’t work unless that was true — given the time value of money, nobody is going to give anyone a bunch of cash in exchange for the exact same amount later. That would be a losing deal. So the idea here is that you get cash now, and the folks who buy your policy make more later
The good things about a viatical settlement
So why would you make a swap at a discount? Simple: The good thing about a viatical settlement is that it gives you cash now. That’s cash you can actually use, and using it properly might effectively make it worth more. Think about your debts: If you don’t pay them right away, they will grow and gain interest. You could destroy your credit rating (the major credit reporting bureaus are not, as it turns out, sympathetic to the plight of those facing medical debt). You could fall into the cycle of debt. Your debts could easily grow at a rate that far eclipses the effective rate of the viatical settlement, meaning you will be in a better financial position if you grab the cash now. In situations like this, viatical settlements are a win-win.
In other words, the good parts about viatical settlements shine in precisely the sorts of situations for which viatical settlements were designed. If you’re sick and facing lots of medical bills without enough cash, but you have a life insurance policy, then you should consider a viatical settlement.
Photo by Sharon McCutcheon on Unsplash
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