A viatical settlement is the sale of an existing life insurance policy by a terminally ill person to a third party in return for a percentage of the face value of the policy paid immediately.
Life-limiting illnesses, in addition to their detrimental health effects, exact a tremendous financial toll upon those insured and their loved ones. With the rapid increase in the number of and the spread of many such illnesses, especially AIDS and certain types of cancer, the use of such assignments by the terminally ill has become more widespread and has developed into the viatical settlement industry. A viatical settlement allows a terminally ill person to enjoy the benefits of his or her life insurance policy while he or she is still alive and to transform a non-producing asset into immediate cash which can be used to improve the quality of his or her life.
Assignments and sales of life insurance policies are as old as life insurance itself. Under law, a life insurance policy is treated as the intangible personal property of the owner. Therefore, as with any other type of personal property, it can be freely assigned by the owner (with the exception of certain restricted policies).
In the late 1980's the first pre-death purchase of a life insurance policy of a terminally ill individual was consummated. In 1990 a financial planner specializing in planning for the terminally ill coined the phrase "viatical" to differentiate a third party transaction from other types of living benefits offered by the insurance companies (cash value loans, annuities, exchange privileges). By 1990, it is estimated that there were six companies in the USA buying policies from terminally ill patients and two broker companies who had purchased about 500 policies with a face value of between $40 and $50,000,000. in 1998 in the USA, it is estimated that $500,000,000 in life insurance policies are viaticated annually.