living benefits

How Living Benefits Replaced Viatical Settlements

What Is a Viatical Settlement?

A viatical settlement is an agreed upon disposition in which someone who is chronically ill or terminally ill sells their life insurance policy at a discounted rate from its original face value for ready cash. In exchange for the cash, the seller of the life insurance policy renounces the right to leave the policy’s death benefit to their assigned beneficiary.

The purchaser of a viatical settlement agrees to pay all of the remaining premiums on the Life Insurance policy along with paying the seller a lump sum cash payout. This particular arrangement allows the purchaser to become the sole beneficiary of the Life Insurance policy and able to cash in the full amount of the policy when the original owner dies.

Qualifications for a Viatical Settlement?

Any individual with a chronic illness, defined as a condition that affects daily living, and an existing policy with an insurance company may qualify for a viatical life settlement. A term life, whole life, universal life, or group life Insurance policy is qualified to be sold by the policyholder. Any policyholder who is interested in converting their policy into a viatical settlement contract should explore companies who specialize in viatical settlements.

A viatical settlement provider will crunch the numbers and give you an exact dollar amount on how much the policyholder should expect. The value a settlement provider offers to a viator depends on several factors. Viators receive this lump sum instantaneously through a viatical settlement provider, without having to wait for an insurance producer to provide the expected death benefit of the policy to the beneficiary.

Each life settlement company considers multifarious amount of factors, including the disease type, the stage of the disease, the insurance premiums, all information pertaining to the policy and the policy’s face value. They use these factors to calculate the offer amount for the policyholder in a viatical settlement contract.

How Can You Use a Viatical Settlement Cash Payment?

You can use the funds offered in viatical settlement contracts with no restrictions.

Here are some ways people choose to use their payout:

  • Take a vacation
  • Cover wages to take time off
  • Cover wages for your family
  • Pay off medical bills
  • Pursue additional treatment
  • Pay for experimental cancer treatments, not covered by insurance
  • Travel to receive medical care
  • Pay for home care or hospice
  • Get extra help around the house with cleaning, childcare, etc
  • Reimburse family members for their care
  • Reduce other debts
  • Pay off their home mortgages
  • Pay for college tuition, or set aside college funds

A Negative Component of Viatical Settlements

From an investment perspective, a viatical settlement is extremely bullish and risky. Essentially, the investor is speculating on the death of the policyholder. The rate of return is ambiguous because it’s unfeasible to determine when the policyholder will pass away. To put this in perspective, the rate of return is determined by the life expectancy of the policyholder. The longer the policyholders life expectancy, the cheaper the policy will become or in other words; the longer the policyholder lives, the lower the rate of return.

What are Living Benefits?

When you purchase a life insurance policy, the purpose is to leave behind a legacy for your family members or designated Beneficiary. This legacy is in the form of a tax free death benefit. But did you know that there are was you can customize your Life Insurance policy with Riders. A rider is an insurance policy provision that adds benefits to or amends the terms of a basic insurance policy. Riders provide insured parties with options such as additional coverage, or they may even restrict or limit coverage. The most impactful Life Insurance rider int the 21st century is the Accelerated Death Benefit Rider also known as Living Benefits. Many life insurance policies automatically include living benefits, with certain limitations. Let’s take a a deeper dive into the inner workings of Living Benefits.

What is a living benefits rider?
A living benefits rider is a provision on your life insurance policy that allows you to extrapolate money from your death benefit tax free if you are diagnosed with a terminal illness, chronic illness and critical illness based on severity.

The Functionality of a living benefits Rider
When you file a claim with your Living Benefits Rider, you are able to withdraw a certain percentage or all of your death benefit depending on the Life Insurance carrier and the severity of your diagnosis. More importantly, the tax free money extrapolated can be spent however you want, but it’s most commonly used to pay for medical bills, long term care and end-of-life expenses.

For example, say you are diagnosed with a rare form of terminal cancer, and the doctors determines that you have 12 months to live. Depending on the Life Insurance carrier, you would be able to use up to 100% your living benefits rider to pay for treatment, hospice care or even take your family on a vacation. Here is a general idea of how a living benefits rider works for both Permanent Whole Life and Term life Insurance:

Permanent Whole Life Insurance with Living Benefits

Permanent Whole life insurance has two components: a death benefit component and a tax-deferred cash accumulation component.
Some permanent whole life insurance policies give you the option of to add an accelerated death benefits rider also known as Living Benefits. Permanent whole life insurance has ceratin provisions that allows you to withdraw needed funds throughout the lifetime of the policy.

Cash value withdrawal. A withdrawal lets you access a portion of the cash value of your permanent life policy. You won’t owe any taxes on this withdrawal if the amount you withdraw is less than or equal to your premium payments. However, you will owe taxes if any portion of the amount you withdraw is from interest, dividends or capital gains. Also be aware that the amount you withdraw will be subtracted from the policy’s death benefit if it’s not repaid.
Policy loan. You’ll be charged interest if you take out a loan against your permanent life policy, but it’s usually lower than the interest charged by other lenders. You also won’t have to undergo a credit check or abide by a long list of restrictions.

Term Life Insurance with Living Benefits

A Living benefits rider for term life insurance include Accelerated death benefits. This living benefit pays out a portion of your term life policy if you ever face a terminal illness. This gives you access to the cash needed to pay for medical expenses, debts and any other expenses associated with your condition. Many people also use the funds to take a dream vacation or make other final memories with their loved ones. Here are four things in mind when it comes to this living benefit:
Different insurers have different life expectancy timeline provisions for when you can access the cash.
The policy may need to be in force for a certain amount of time before you can access the living benefits.
You may be charged interest on the portion of the accelerated death benefit that you use.
The advanced amount is typically subtracted from the total amount your beneficiaries receive after you pass away.

In Summation

A properly balanced planning strategy can allow clients at any stage
of their financial plan to capture the significant long-term benefits of Life Insurance. Viatical Settlements were traditionally used as a risky investment strategy that relied on death speculation. The investor can only see a higher return if the policyholder passes away expeditiously. The longer the policy holder lives, the lower the return of the investment. Since it’s inception, Living benefits have proven to be the best alternative to Viatical Settlements for both Life Insurance Policyholders and investors. The rider gives the policyholder the option to utilize their death benefit while they are living to cover medical expenses rather than being forced to sell their policy to access the money needed to cover those expenses.


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