Viatical and life settlement providers

A settlement provider buys a life insurance policy from its owner for more than the cash surrender value but less than the death benefit. The provider, or the investors it represents, becomes the owner and beneficiary, keeps paying premiums and collects when the insured dies. A viatical settlement involves an insured who is terminally or chronically ill; a life settlement usually involves an older insured, often 65 or older, who isn't terminally ill.

Most states license and regulate providers and the brokers who represent sellers, require disclosures, and restrict settlements in the first years after a policy is issued. Price depends mainly on the insured's life expectancy, the premiums still to be paid and the death benefit. Hypothetically, a 78-year-old with a $1 million universal life policy and $40,000 of surrender value might receive an offer of $150,000. Under federal tax law, viatical proceeds paid to a terminally ill insured by a licensed provider are generally tax-free; life settlement proceeds can be partly taxable.

Before selling, compare offers through a licensed broker, check whether your policy has an accelerated death benefit, and consider the effect on beneficiaries and on means-tested benefits. Be wary of anyone proposing to buy a policy before it's issued, which is STOLI. See life settlements: selling your life insurance policy and viatical settlements for the terminally or chronically ill.