No one wants to talk about how their finances will look at the end of their lives, but it is a conversation that should be had. With nearly a third of Americans lacking any sort of life insurance policy and one-fifth of those policyholders of the belief that what they have isn’t sufficient, there is a potential problem emerging in the United States regarding end-of-life attitudes.
However, a lack of knowledge around life insurance policies is only part of the problem. For so many Americans, policyholders or not, there is a belief that life insurance will only benefit anyone once they have passed away. They aren’t completely wrong either, as life insurance payouts (known as death benefits) are only distributed in the event of the policyholder’s death in order for loved ones to tie up financial loose ends. This, coupled with the growth in popularity of pre-paid funerals, and more shrewd money management in the wake of the Covid-19 pandemic’s effect on the economy, life insurance is just not as popular.
What’s the alternative?
One option that has really gained traction as an alternative to life insurance policies in recent years has been that of using a viatical settlement. Viaticals are more aptly defined as a life insurance transaction instead of a policy itself, and also solve the problem of the policyholder getting to use the insurance payout themselves instead of it being a morbid benefit of passing away. However, there are a few prerequisites that need to be considered before opting for a viatical settlement.
The way they work is this:
- A life insurance policyholder is diagnosed with a chronic or terminal illness that will completely incapacitate them or end their lives within 24 months.
- They speak to a viatical broker, who helps them to sell their life insurance policy to a third party beneficiary for an upfront lump sum. The cash value of this will be less than the death benefit would be had it been applied in a conventional way, but will be higher than the policy’s cash surrender value if it had been sold back to the life insurance company who initially sold it.
- The third-party beneficiary continues to pay the monthly premiums of the life insurance policy and receives the death benefit upon the original policyholder’s passing.
It bears repeating that a viatical settlement can only be reached if the original policyholder is not expected to live longer than another two years. Someone who is wishing to sell their life insurance policy but is not terminally ill can do so via a life settlement instead.
Why a viatical settlement?
If the payout is going to be less than the death benefit, then why have viaticals become a popular choice? Their popularity is localized in large part to the U.S., due to the healthcare costs and unique financial positioning. The convenience of having an upfront and tangible payment to help cover costs for end-of-life care where medical insurance may not, can outweigh the deficit of the amount compared to the death benefit. Plus, the American Life Fund, largely considered to be the best viatical broker that there is, aims to ensure that their viatical settlements are 70% of what the death benefit would have been. This is an amount that can make a real difference to an ill person, or simply help tick off a great many entries of a bucket list.
For the Rest of the World
Whilst not every other country besides the United States has healthcare that is free at the point of use, viatical settlements are yet to get the same attention around the world. The life settlement industry is yet to take off globally, and so more unique methods of end-of-life funding would need to be explored. For Australians, one suggestion would be to calculate repayments for home mortgages and see if there is anything that can be gained there. For this, a good place to start would be Loans.com.au and comparing mortgage insurance rates to get closer to bolstering your life insurance policy.