Pitfalls of Selling Your Life Insurance
You’ve been diagnosed with a terminal illness, and the medical bills are only just starting to mount. That’s when you learned of viaticals. A famous sports figure came to your city and gave a talk on the benefits of something you’d never heard of: selling your contract to a broker, through what has come to become know as a “viatical settlement.”
It seems like an answer to prayer for many who have found themselves in this situation. Money now for when they someday die, a way to have money in the bank and cover the expenses of life and medical treatment. Because this is what a viatical is: the purchase of a terminally ill person’s policy for a certain percentage of the policy’s face value. If you should decide to sell your plan in this arrangement, then you are known as a “viator.”
See, the one buying your plan becomes the signed beneficiary on your life insurance in exchange for, say, 70% of the plan’s face value. And when you die, they receive the full benefit. So, in this example, the buyer has therefore made a profit of 30 cents on the dollar.
Is it a good deal for those who are ill and in need of financial assistance? It all depends. It can be a real boon for some who’ve been diagnosed with a terminal illness, but there are also significant drawbacks. According to the National Association of Insurance Commissioners, here are a few of them for the insured and for the one intending to buy the life insurance agreement:
Drawbacks to Selling
- Your previous beneficiary gets nothing - When you sell your plan, you sign over the benefits to the buyer. That means whomever you have listed as your beneficiary - a spouse, a child, a charity - gets nothing upon your death from this policy.
- Gain on the one hand may mean loss on the other - Upon selling your agreement, you may gain a rather large windfall of money. That could mean the loss of any government sponsored medical benefits, like Medicaid. And if that happens, you might be left without health coverage. It isn’t the easiest thing to acquire when you’ve been diagnosed with a terminal illness.
- The IRS may come calling - If you sell a policy when you have a life expectancy of less than two years, the windfall from a viatical sale is tax exempt. However, if you have a longer life expectancy, you may have to pay taxes on the money. (If you do consider becoming a viator, be sure to contact a tax specialist for advice.)
- You may need to hire financial & tax advisors - As alluded to in the previous point, there are complications associated with selling a viatical or a policy. Not only might you need advisors to head off the possible headaches, it might be a wise decision. You will not likely want to spend the remaining precious months dealing with rules and regulations. And, the stresses associated with all of that might not be good for your health.
- There are those who would take advantage of you - When you sell a plan, that can give the impression that you are over a barrel and perhaps willing to sell your coverage for much less than it is worth. In the above example of making 30 cents on the dollar, how many would be more likely to pay 30 cents on the dollar to someone they felt were desperate? Or what of the access to personal information that the process requires? Without a doubt, knowing who you are dealing with is imperative. And making sure they are legitimate can be a stressful experience in and of itself.
Despite these drawbacks, you might still choose to move forward for many reasons. But before you do, be sure to look into the process and find out whether those buying viaticals must be licensed in your state. And do not deal with anyone without confirming they are licensed, bonded, and come with a good reputation for respecting viators.
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