Life Settlements vs. Viatical Settlements vs. Term Life Accelerated Death Benefits: Which One’s Right for You?

Why Term Life Insurance Policyholders Seek Early Access to Funds

When faced with unexpected financial pressures, many term life insurance policyholders may seek early access to their funds to help ease the burden and provide financial relief during difficult times.

Financial pressure from rising costs and reduced income

The financial pressure from rising healthcare costs, debt, caregiving, or reduced income and the need for long-term care can become overwhelming, especially during challenging times. Many people find themselves in a difficult position where their life insurance can offer much-needed support. 

Is the policy really worthless until the policyholder passes?

There’s a common misconception that term life policies are “worthless” unless the policyholder passes away. However, these policies can still provide significant value in times of need with options like accelerated death benefits or settlements that can assist with immediate financial needs.

A growing need to access cash

As more seniors face the challenges of dwindling savings or rising medical expenses, having quick access to cash is becoming more important. Life insurance can provide that crucial financial safety net, helping you manage this stage of life with greater peace of mind.

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What is a Life Insurance Accelerated Death Benefit?

A term life accelerated death benefit (ADB) is typically paid as a lump sum, giving you the flexibility to use the funds you need to reduce financial strain.

How it Works

Typically offered as a rider on life insurance policies, a term life accelerated death benefit allows you to access a portion of your death benefit early if you are diagnosed with a terminal or serious illness. The payout usually ranges from 25% to 95% of the policy’s face value, depending on the insurer. It can help provide financial support when you need to cover medical expenses, caregiving costs, or other urgent needs.

Learn how accelerated death benefits work

Who qualifies for an accelerated death benefit?

You usually need to be diagnosed with a terminal illness, often with a life expectancy of 12-24 months, to qualify for an accelerated death benefit. However, some policies may include riders for conditions that aren’t terminal but still need substantial care. In any case, you’ll need to meet the insurer’s requirements and may have to provide medical documentation to confirm your diagnosis.

The pros and cons of an accelerated death benefit

Pros:

An accelerated death benefit doesn’t require a third party, which makes the process much more straightforward. In times of a medical emergency, that means you can access those critical funds quicker. In addition, there may be instances where the payout is tax-free, giving you even more financial support when you need it most.

Another benefit is that even if you qualify for an ADB, you can still keep or sell the remaining portion of your policy, so you’re not giving up the whole thing, just unlocking part of its value when it matters most.

Cons:

While the accelerated death benefit does provide you with quick financial support, there are some trade-offs to consider. For one thing, the funds you access early will reduce the final death benefit for your beneficiaries. In addition, these funds are typically reserved for illness-related expenses, and not all life insurance policies include this option. It’s also important to know that qualifying for an ADB can be quite difficult, often much harder than qualifying for a life settlement or viatical settlement.

What is a Viatical Settlement?

A viatical settlement allows you to sell your life insurance policy to a third party in exchange for a lump sum payment. In this arrangement, the buyer takes over paying the future premiums and receives the full death benefit when you pass away. Read our full guide to viatical settlements for more details. 

Who qualifies for a viatical settlement?

A viatical settlement is an option for individuals who:

• Are facing a terminal or chronic illness, allowing them to sell their life insurance policy for a lump sum.
• Have a life expectancy of under 24 months (though this can vary by provider).
• Hold any type of life insurance policy, including term life, if it’s convertible into a permanent policy.

The pros and cons of a viatical settlement

Pros:

A viatical settlement can sometimes offer a larger lump sum payment than an accelerated death benefit (ADB). The money can be used for any purpose, giving you flexibility to manage your personal financial needs during difficult times.

Cons:

The primary drawback of a viatical settlement is losing the death benefit for your beneficiaries. Additionally, it could affect your Medicaid eligibility, and you’ll be required to disclose your health information to the buyer.

What is a Life Settlement?

A life settlement allows you to sell your life insurance policy to a third party in exchange for a lump sum payment.

How it works

A life settlement allows you to sell a life insurance policy you no longer need or can afford in exchange for a lump sum payment. If you’re not facing a serious illness, a life settlement could be a viable option.  It’s most often used by seniors over age 65 who may no longer need their policy or want to free up cash for other expenses. Your payment amount is typically higher than the policy’s surrender value but lower than the death benefit, so you have immediate access to funds that can be used for healthcare costs, retirement, or other financial needs.

Can you sell a term life insurance policy?

Yes, you can sell a term life insurance policy, but often only if it’s convertible to a permanent policy (in some cases, non-convertible term policies can qualify). First, you’ll need to determine if your policy is eligible to be converted and then convert it to a permanent policy. After converting it to a permanent policy, and if you are eligible for a life settlement, you can sell it to a life settlement provider for a lump sum, providing you with immediate cash for medical and other expenses.

Here’s how the sale process works for permanent policies like universal life.

Pros and cons of a life settlement

Pros

Life settlements can provide a payout that often exceeds the cash surrender value of a life insurance policy. One significant advantage is that eligibility isn’t limited by your health, so you don’t have to be terminally ill to qualify. Plus, the money you receive can be used for any reason, giving you more flexibility to meet your financial needs.

Cons

The payout from a life settlement can be subject to taxes based on your specific circumstances. If you’re looking to sell a term life insurance policy, remember that you’ll need to convert it into a permanent policy, which adds an extra step to the process. Another thing to note is that if you decide to sell your policy, your beneficiaries will no longer be entitled to receive the death benefit.

Explore how the payout compares to your policy’s cash surrender value.

Comparing Life Settlements, Viatical Settlements, and Term Life Insurance Accelerated Death Benefits

Which Option Is Right for You?

When considering selling life insurance policies, you often have specific needs based on your circumstances. Understanding these differences can significantly impact your ability to meet your financial needs and the needs of your loved ones.

•   If you have term life insurance and are terminally ill, check for an ADB rider and consider a viatical.
•   If your term policy is convertible and you’re over 65, you may qualify for a payout through a life settlement
• If your priority is keeping part of the death benefit for your family, an ADB might be the best compromise.
  

No matter what you choose, make sure to weigh your surrender value against a potential settlement offer.

Final Thoughts: Know Your Policy, Explore Your Options

Term life insurance may have more value than you think. Always review your policy for riders, like an Accelerated Death Benefit (ADB), or check if conversion options are available. Speaking with a financial advisor or licensed life settlement provider can help you navigate your choices. Ultimately, you’ll want to ensure you’re selecting the option that aligns with your financial goals and health status to make the best decision.

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