A viatical settlement (from the Latin “viaticum”) is the sale of a policy owner’s existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. Such a sale provides the policy owner with an lump sum. The third party becomes the new owner of the policy, pays the monthly premiums, and receives the full benefit of the policy when the insured dies.
“Viatical settlement” typically is the term used for a settlement involving an insured who is terminally or chronically ill. A person generally is chronically ill if the person (1) is unable to perform at least two activities of daily living, such as eating, using the toilet, bathing oneself, or dressing oneself; (2) requires substantial supervision to protect himself or herself from threats to health and safety due to severe cognitive impairment; or (3) has a level of disability similar to that described in (1) as determined by the U.S. Secretary of Health and Human Services. A person generally is terminally ill if the person has an illness or sickness that can reasonably be expected to result in death within two years.
As medical advancements improved the lives of those persons living with terminal or chronic illnesses, the life settlement industry emerged.
From the perspective of the investor, purchasing a viatical is similar to buying a zero coupon bond with an uncertain maturity date. The return depends on the seller’s life expectancy and when he or she dies.