Everything has a price and when you need money, selling your life insurance may sound like a good idea—especially if you are extremely sick because you can generally get anywhere from 50 to 80 percent back off the face value. However, although it may sound like a viable option, it’s important to keep in mind why you bought the life insurance policy in the first place!
Things to consider
When a viatical company is interested in buying your life insurance policy and they know you are ill, they will demand access to your medical records. Ultimately, the buyer makes the most money off of your policy the longer you are expected to live. Any and all details about your medical history and condition will be run over with a fine-toothed comb. Don't forget, they will keep track of your progress, many times using little to no discretion, by calling you on the phone, mailing out postcards, or getting in contact with you through a pre-determined means of communication. To sum it up, anyone (creditors included) will have open access to view your transaction.
Below are tips to consider before you sell your life insurance policy:
Check into alternatives. If you need cash quickly, there may be other ways to get it, without having to sell your life insurance policy to a viatical settlement company. Check with your current life insurance company and see if they offer an accelerated death benefit. You may be charged a fee for acting on it, but at least you will be doing business with a company you know and trust.
Talk it over with your beneficiaries. It’s a good idea to discuss your thoughts on selling your life insurance with your beneficiaries. If they are depending on your death benefits to pay for the cost of your outstanding medical treatment, they will need to know.
Consult your accountant, financial planner or attorney. There are many financial aspects you should find out before selling your life insurance policy. Ask if the proceeds will be tax-free and what kind of impact it will have on probate and estate settlements. According to the Health Insurance Portability and Accountability Act, if the insured is terminally ill the settlement is not subject to federal income taxes; but if the insured is mildly ill or healthy, the settlement will be taxed as a capital gain.
Check on viatical licensing or regulations. Your state insurance department will be able to tell you what laws there are for viatical companies or viatical brokers, such as the requirement for them to be licensed.
Affects on public assistance. Public assistance is typically based on financial need, so if you go through a viatical life settlement, you may hinder the amount of assistance you get, as well as opening yourself up to creditors—because viatical life settlement proceeds are fair game in the financial world.
Shop around for viatical companies. Companies differ on the amount of payout they offer for viatical life settlements, so be sure to shop around and compare. The Viatical Association of America recommends getting at least three different offers, so you can compare and see what the best and most beneficial payout will be.
Escrow accounts. For legitimate viatical companies, getting a request to have an escrow account opened and ready when you accept the settlement is no big deal. But if the company you are going to sell your account to denies your request, it is right to assume that they may be fraudulent—because the denial of the account is a red flag that the money may not be there to cover your offer.
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