The term viatical settlement is commonly used as a synonym of the term life settlement. It is also used more specifically to denote life settlements in which terminally ill life insurance policyholders sell their policies to third party investors.
As with other life settlements, investors pay an initial lump sum to compensate policyholders for premiums paid up until the point of sale. This amount is generally lower than the face value of the policy, but often significantly higher than the cash value of the policy. So the policyholder receives higher compensation than they would by surrendering their policy to the insurance company in exchange for its cash value.
After purchasing a policy, the investor acts as a financing entity and covers the premiums of the life insurance policy until the policyholder’s death – after which they collect the corresponding death benefits.
Viatical settlements provide terminally ill individuals with a way to convert their life insurance policies into liquid assets ahead of their deaths at a relatively low loss compared to surrendering their policy to their insurance providers. The money obtained could, for example, allow them to pay medical bills, gift money to loved ones or causes which are meaningful to them or to fulfill personal goals or travel wishes before they die.
However, viatical settlements have been the subject of significant controversy because they allow investors to speculate on the life expectancy of the terminally ill.
In Switzerland, many lenders accept mixed life insurance policies (whole life) as collateral against loans. This allows policyholders to access capital without surrendering their policies.