Steps to apply for a life settlement or viatical.

By now you're aware that a life insurance settlement or viatical involves the sale of a life insurance policy to a funding company. In exchange, the policy owner typically receives a lump sum of cash.

Why does all this work? It's a matter of having built up equity into an insurance policy. After years or even decades of paying premiums the policy owner has built up substantial equity in their life insurance policy. That equity is just the expectation of receiving the face amount of life insurance - as the insured ages, the expectation of receiving the face amount increases.

In most cases this equity will be unrealized. Insureds will simply lapse their policy, quit paying premiums and let any cash value pay for the premiums until the policy lapses, or simply cash in the insurance policy for any cash surrender value. In all of these three possibilities the unrealized equity in the policy is not only not recognized - it's lost completely for absolutely no return value.

Life insurance settlements and viaticals allow policy owners to realize this equity, in the form of a cash payout in exchange for the policy. As such it can be a very profitable arrangement for the policy owner, particularly in light of the above three alternatives.

Steps to apply for a life settlement or viatical.

While mechanically both products are similiar and the most noticeable difference is just the life expectancy of the insured (very short for a viatical and longer for a life settlement) there are a few differences that crop up in practice.

First, due to the urgent need that may be imposed on a person in a viatical situation some states define and license viaticals a bit differently than they do life settlements. Others do not (and yet others are basically silent on the issue). Your life settlements broker will need to be licensed in your state and will be aware of any legislation affecting the transaction. One example of this type of legislation would be a requirement that the funding company provide a minimum amount (normally a minimum percent of the death benefit) to the insured.

Secondly funding companies are moving towards a greater interest in life settlements over viaticals. That's caused by both past bad publicity as well as advances in medical technology. It's increasingly risky for a funding company to assume that a specific medical condition won't be solved in short order. This happened in the 80's during the birth of viaticals. Many funding companies invested in life insurance policies of HIV positive consumers. Shortly thereafter new advances in AIDS drugs dramatically extended the lives of many of these insured. While that's clearly a good thing, from the perspective of the funding company who must determine how much to pay out, the insured's payout will be a lot lower if the funding company won't realize it's investment for a long period of time.

Steps to apply for a life settlement or viatical.