How much is a Life Insurance Policy Worth? What is a Viatical Settlement?

A viatical is when a life insurance policy is sold by the policy owner before the maturation of the policy.

How much does a viatical settlement yield?

Typically a viatical settlement yields less than the face value of the life insurance policy, but more than the total premiums that were paid, and more than the surrender value.  The sale of a viatical yields the seller an immediate cash amount.

Why would someone sell a viatical?

Viatical settlements are often sought by people with a terminal illness where life expectancy is short, but high medical costs present themselves at the present.

How does the viatical settlement buyer make money on the transaction?

The viatical settlement buyer receives the face value of the life insurance policy when the person dies.  So the investment return on a viatical settlement depends on amount of time that elapses between the viatical settlement and the person's death (as well as the difference between the viatical settlement price and the face value of the life insurance policy).

How is the price determined for a viatical settlement?

Let's suppose the face value of the life insurance policy is one million dollars.  Now the seller must estimate how long the person will live.  In the case of a known terminal illness, this timespan may be relatively short.  But for the sake of this example, let's suppose the life insurance policy buyer estimates the remaining lifespan at three years.

Typically the life insurance policy buyer (the person making the viatical settlement offer) has a per annum return he or she wants to get on the invested money.  For our example let's suppose that amount is 10% per annum.

Example viatical settlement offer calcuation:

Life insurance policy face value: $1,000,000

Buyer target return rate: 10% p.a. (per annum)

Anticipated remaining lifespan: 5 years

So now we can calculate the absolute maximum viatical settlement offer price using the compound interest formula.  And for our example above, the absolute maximum offer for the life insurance policy as a viatical settlement would be $620,921.32.

This example is downloadable as an Excel 2007 spreadsheet here: VIATICAL-SETTLEMENT-OFFER-PRICE-EXAMPLE-CALCULATOR.xlsx

Here is an image of the calculations from the spreadsheet:  (If this image does not appear correctly in your browser, you can try this GIF version instead.

Viatical settlement risk

A primary risk to the viatical settlement maker or buyer is the remaining lifespan.  If the buyer makes the offer anticipating a maximum lifespan of the seller of say three years, but then the seller lives say six years, it makes a large difference in the return on investment.  So the buyer must carefully consider risk in making the offer.

It could also be suggested that the life insurance policy seller and the buyer be complete strangers due to the obvious sensitive nature of this transaction.  This suggestion occurs because the longer the insured person lives, the less money the policy buyer makes.  So this scenario causes an implicit conflict of interest for the buyer if he or she knows the insured person.

Also, if the insured person lives far longer than was anticipated, the buyer may have to pay additional premiums to the insurance company in order to maintain the policy.

The SEC has additional information on viatical settlements here.

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