A viatical settlement is the sale of a person’s life insurance policy’s death benefits to a third party in consideration for cash. Usually, the personal selling their own life insurance policy is terminally ill and requires immediate cash for some purpose, commonly to pay for medical treatment. The policy is sold at a discount from its payment value allowing the purchaser to realize a potential return on investment.
It sounds kinda weird, but here’s how it works. Let’s suppose that Bill is terminally ill with cancer and desperately needs money to pay for palliative treatment to increase his quality of life remaining. He has a life insurance policy that will pay out $500,000 upon his death but he is not too worried about beneficiaries because his wife has already died and his children are all grown up and established. Bill thus sells his life insurance policy’s death benefits to Harmon, a friend, in exchange receiving $400,000 in cash. Bill uses the money during his last few months of life and when he dies Harmon receives the $500,000 payout.
Obviously, viatical settlements can be controversial because they in effect speculate upon the death of an individual. For example, if Bill makes a miraculous recovery and lives another thirty years, Harmon’s just out of luck for awhile.