Cancer, organ transplant, heart surgery, Alzheimer’s disease — these are scary, life-changing conditions that can dramatically impact your family’s quality of life.

You can buy life insurance to provide for your family after you die, but what are your choices when you need to provide for your family while you are still alive? If you have life insurance, two options may be available: a viatical settlement or an accelerated death benefit.

What is a Viatical Settlement?

A viatical settlement is an agreement to sell your life insurance policy to a viatical settlement company. This option may be available if you are terminally ill, meaning you have two years or less to live.

A viatical settlement company is an investment company that purchases life insurance policies for a cash value that is less than the full value of the death benefit. The viatical settlement company then pays the premiums on the policy until the policyholder’s death, at which time the company (not the policyholder’s original beneficiaries) receives the death benefits.

Viatical settlements can provide between 60 and 80 percent of the life insurance payout in a lump sum payment at a time when a family may need cash to pay for medical treatment and living expenses. The policy then becomes the property of a third party and the family is no longer eligible for any of the life insurance benefits.

What a Settlement Might Mean for You

A large infusion of cash into the family finances from a viatical settlement could affect family members’ eligibility for assistance such as Medicaid or charity-provided medical care. The payment may also bring tax consequences. Consult with a financial advisor or a life insurance lawyer who is experienced with viatical settlements before agreeing to a viatical settlement.

The Pennsylvania Viatical Settlement Act regulates activities around viatical settlements. These are complicated financial agreements regulated by both the Pennsylvania Insurance Department and the Pennsylvania Securities Commission. An experienced life insurance attorney who understands the regulations should be consulted whenever a viatical settlement is contemplated.

One of the primary differences between viatical settlements and accelerated death benefits is that viatical settlements are agreements with a third party beyond the policyholder and the insurance company, while accelerated death benefits are an arrangement between the policyholder and the insurance company.

When a third party is brought into the equation, the transaction can be complicated and the consumer (the policyholder) needs additional protections. That’s part of what spawned the need for specific Pennsylvania laws about viatical settlements. One of the protections provided is that the person selling his or her life insurance policy can cancel the transaction for up to 15 days after the payment for the policy is made. In addition, if the policyholder dies within 15 days after the payment for the policy, the transaction is automatically reversed.

One warning the Pennsylvania Insurance Department issues is for consumers to be wary of any person or company that approaches them about buying their life insurance. Viatical settlement brokers and providers must be licensed in Pennsylvania. Criminals take advantage of families’ dire circumstances, so only deal with licensed, reputable insurance providers and brokers.

Life insurance attorney Chad G. Boonswang helps families understand viatical settlements and other options when a life insurance policyholder becomes terminally ill. Contact him today for a free consultation.