Gambling on selling your life insurance
Viatical comes from the Latin word for 'provision on the journey', and involves using your life insurance before you pass away. Most people are fairly unfamiliar with the process of creating viaticals. Viaticals are a somewhat obscure component of financial planning, so it can be hard to get good advice - especially if you're already in trouble.
The way viaticals work is simple. Instead of waiting for his or her loved ones to receive the life insurance settlement after death, the 'viator' sells the policy to a broker (who may resell the policy as an investment) and receives a sum of money up front to use toward:
- staving off mortgage foreclosure
- paying hefty medical bills
- relieving other financial distress
Viaticals can be a useful tool for estate planning. You won't risk depleting any savings you may have acquired and you can be assured that your loved ones won't be left in debt because of your situation.
For the viator, viaticals probably seem to provide a win-win situation: a quick cash settlement deal that can take away their immediate financial problems, with no more payments on a life insurance policy.
However, there is a lot of room for abuse by unscrupulous brokers. Some brokers renege on payout contracts after the policy has changed names. In order to avoid this problem with viaticals, viators should never accept an installment payment plan. Have the money deposited in an escrow or trust account.
Investing in Viaticals
For their part, brokers do gamble on viaticals. The life insurance policy remains intact, so payments must still be made. The broker buys a policy (for a reduced settlement amount) and keeps making the life insurance payments. In effect, a viatical is the broker's bet on the life expectancy of the viator.
When someone besides a broker purchases viaticals it's typically considered as a humanitarian investment. The investor buys the policy from the broker (who will take a commission from the sale) and continues to pay the premiums until the policy holder has died. The investor then expects to collect the insurance money. Viaticals can be a risky investment though, because there is no guarantee as to when the policy holder will die. You could be stuck with payments over a long period of time that will never pay out what you put into them. There is also a risk that the insured heirs will contest the viaticals. Be cautious when considering this investment.
Viaticals became popular in the 1990s when terminally ill AIDS patients opted out of life insurance policies in order to pay for expensive medical care. Later, viaticals were adopted by people with cancer and other terminal illnesses. They're slowly becoming a more acceptable way to utilize life insurance.