Legal Definitions - Investor Protection Guide: Viaticals

A viatical settlement, also known as a life settlement, is when someone sells their life insurance policy to another person for less than the death benefit. The seller is usually someone who is terminally ill and wants to cash out their policy before they die. However, people who are not terminally ill can also sell their policies. The buyer of the policy will collect the death benefit when the seller dies.

Viatical settlements can be risky investments. Salespeople who earn large commissions may pressure investors to buy them. The return on a viatical investment depends on the seller's life expectancy and the actual date of death. If the seller dies before the estimated life expectancy, the investor will receive a higher return. But if the seller lives longer than expected, the investor's return will be lower. The investor may even lose part of their investment if they have to pay additional premiums to maintain the policy.

For example, if someone buys a viatical settlement for $50,000 and the death benefit is $100,000, they will make a profit of $50,000 when the seller dies. However, if the seller lives longer than expected and the investor has to pay additional premiums, they may lose some of their investment.

Before investing in viatical settlements, investors should do their research and ask their state insurance commissioners for more information.

For more information, see: , National Association of Insurance Commissioners (NAIC).