Losing your death benefit can have a significant impact on those you leave behind, so viatical settlements should not be taken lightly. You may no longer need to sell your policy because many policies now include life insurance riders to help support you while you're still alive.

What is a viatical settlement?

You sell the benefit of your life insurance policy in a viatical settlement when you have very little time left to live due to illness or injury, often less than two years. You can sell any type of life insurance policy — term, whole, universal, and so on — but you must first find a buyer in the market for that policy.

Sales of a life insurance policy are commonly referred to as life settlements, and when they occur near the end of life, they are referred to as viatical settlements.

Though they frequently apply in the same situations, viatical settlements are distinct from policy options that allow you to access a portion of your death benefit while you are still alive. The accelerated death benefit rider is the most common version of this, and it allows you to take a portion of your death benefit if you are diagnosed with a serious or terminal illness.

For some people, the lack of an accelerated death benefit provision or the need for more money than the benefit provides may prompt them to sell their policy's future benefit.

How much does a viatical settlement pay?

A viatical settlement payment will be somewhere between the value of the policy's death benefit and any cash value the policy has accrued.

Consider a hypothetical permanent life insurance policy that pays out $1 million if you die. This policy may have accrued a cash value of $150,000 over the years, allowing you to obtain cash from your life insurance by borrowing or withdrawing some of this value.

If the $150,000 is insufficient, you may be able to obtain a $500,000 viatical settlement by surrendering the policy.

The actual amount paid is determined by all of the values involved as well as the seller's life expectancy. As a general rule, the longer you live, the less you'll be paid. Taking a viatical settlement also means that your original life insurance beneficiaries will receive nothing from your policy when you die.

In comparison, an accelerated death benefit rider may allow for monthly payments over a two-year period. Your $1 million policy may allow for total payments of $250,000, and when you die, your beneficiaries will receive $750,000 — the original $1 million minus your $250,000 in accelerated payments.

Amounts will differ depending on the value of your policy, your health, the type of policy you have, and even the state you live in. Accelerated death benefit riders typically allow you to withdraw 25% to 95% of the value of your policy. Viatical settlements are typically between 55% and 80% of the policy's value.

Viatical settlement basics

In most states, participating in a viatical settlement necessitates that both you and the buyer (the "viatical settlement provider," which is usually a company) meet certain requirements, including health-related rules. Most settlements, like an accelerated death benefit, require you to be chronically ill or suffering from a terminal illness.

To get the best tax treatment for your payment, you must sell to a company in your state. Viatical settlement taxation can be complicated, so anyone thinking about settling should consult with an independent financial advisor.

In many cases, your policy must be a certain age before it can be sold. Before selling a viatical settlement policy, many states require that you have held it for at least two to five years. This is to prevent you from purchasing a policy to sell immediately after receiving a terminal diagnosis.

Alternatives to viatical settlements

An accelerated death benefit can often replace the need for a viatical settlement. The application process for an accelerated benefit is relatively simple. The rider is available on most insurance policies, and the benefits are frequently comparable to those offered by a settlement.

If you have life insurance with a cash value, you may be able to borrow against it. A life insurance loan keeps your coverage in place while also providing immediate cash and leaving something for your beneficiaries.