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Sound Advice: October 25 ,2023

Sell Your Life Insurance To Raise Money?  Not So Fast!

Along with an increasing number of other questionable commercials aimed at consumers, there are more than a few suggesting that it’s time to sell your life insurance policy and enjoy the cash now.   For some folks, this may sound interesting, but they are anything but win-win situations.

These kinds of transactions are known as viatical settlements.  In the past, they involved the sale of a life insurance policy by a terminally ill or chronically ill policyholder to a third party for less than the policy's face value but more than its cash surrender value. Although viatical settlements can provide immediate cash to individuals facing terminal or chronic illnesses, there are several reasons why they might be considered a bad idea or come with significant risks, especially for people in good health.

  1. Reduced Payout: The policyholder typically receives less money through a viatical settlement than the death benefit of the life insurance policy. This reduced payout might not cover the full extent of the policyholder's financial needs, especially if there are outstanding medical bills or other expenses.
  2. Impact on Beneficiaries: The beneficiaries of the life insurance policy receive nothing from the settlement, as the policy is no longer in effect. This can significantly affect the financial security of the policyholder's loved ones after their passing.
  3. Tax Implications: While the proceeds from a life insurance policy's death benefit are usually tax-free, the money received from a viatical settlement might be subject to taxes. This can further reduce the overall payout received by the policyholder.
  4. High Fees and Costs: Viatical settlement companies often charge high fees and transaction costs, reducing the amount the policyholder receives. These fees can significantly eat into the funds the policyholder needs for medical care and other expenses.
  5. Potential Scams and Fraud: The viatical settlement industry has been plagued by scams and fraudulent activities. Some viatical settlement companies may take advantage of vulnerable individuals, offering deals that seem too good to be true and then failing to deliver on their promises.
  6. Loss of Control: Once the viatical settlement is complete, the policyholder loses control of the policy. They no longer have the option to change beneficiaries or use the policy for other purposes, which can be a significant drawback, especially if the policyholder's circumstances change.
  7. Impact on Medicaid Eligibility: The funds received from a viatical settlement can affect the policyholder's eligibility for Medicaid and other government assistance programs. This may limit their access to healthcare and support services.
  8. Ethical Concerns: Some people view viatical settlements as ethically questionable, as investors essentially profit from the death of the policyholder. This can raise moral and ethical dilemmas for both the policyholder and their loved ones.

Given these potential drawbacks and risks, individuals considering a viatical settlement should thoroughly research the transaction, consult with financial advisors, and carefully consider the long-term implications before making a decision. It's crucial to work with reputable and licensed viatical settlement providers to minimize the risk of fraud or exploitation.

 N. Russell Wayne, CFP

Any questions?  Please contact me at nrwayne@soundasset.com


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