Navigating the financial aspects of a terminal illness can be daunting, especially when considering how to utilize your life insurance to manage expenses. A viatical loan is one option that allows you to access funds from your life insurance policy. This guide will explain what a viatical loan is, how it works, its advantages and disadvantages, and some alternative options you might consider.
What is a Viatical Loan?
A viatical loan allows you to borrow against your life insurance policy when you have a terminal illness diagnosis. Unlike a traditional loan, viatical loans focus on the value of your life insurance policy rather than your credit status or financial history. The amount borrowed is then repaid from the death benefit of your policy.
How Viatical Loans Work
Viatical loans provide a percentage of your policy’s face value as a loan, which can range from 30% to 70%, depending on various factors including your health and the policy’s details. The lender also assumes responsibility for continuing the premium payments on your insurance to keep the policy active.
Eligibility for viatical loans generally requires:
- A terminal diagnosis with a life expectancy of 24 months or less.
- A life insurance policy with a minimum face value, often $50,000 or more.
Application Process
During the application, you’ll grant the lender access to your medical records. An adjuster, appointed by the lender, assesses your policy and health to offer a loan amount. If accepted, you assign your policy’s death benefit to the lender as collateral. There are no repayments during your lifetime; the lender is reimbursed from the death benefit after your passing, and any remaining funds go to your designated beneficiaries.
Differences Between Viatical Loans and Viatical Settlement.
While both involve your life insurance, the primary difference lies in the payout and impact on beneficiaries:
- Viatical Loans provide a loan against your policy, allowing beneficiaries to still receive a portion of the death benefit after the loan is repaid.
- Viatical Settlements involve selling your policy in exchange for a lump sum that is typically higher than a loan would provide, but leaves no benefit for your beneficiaries.
Pros and Cons of Viatical Loans
Pros:
- Beneficiary Benefits: Beneficiaries may still receive a portion of the death benefit after the loan and associated costs are paid.
- No Upfront Costs: The loan covers its own fees through interest and is settled from the death benefit.
Cons:
- Limited Loan Amount: The loan amount is determined by the lender based on your policy and health, not by your financial needs.
- Interest and Fees: These reduce the death benefit that your beneficiaries will receive.
Alternatives to Viatical Loans
Before choosing a viatical loan, consider other financial options that might be more suitable for your situation:
- Life Insurance Policy Loans: If you have a permanent life insurance policy with cash value, borrowing against this may offer a simpler and cheaper alternative.
- Viatical Settlements: Selling your policy might provide a larger immediate cash payout than a loan and eliminate concerns about ongoing premiums or partial benefits to beneficiaries.
- Home Equity Loans, Reverse Mortgages, or Personal Loans: These could provide needed funds without impacting your life insurance.
Consulting Professionals
Given the complexities and significant financial implications, consulting with financial and tax advisors is crucial to make an informed decision that aligns with your financial situation and end-of-life care needs. They can help you weigh the pros and cons of each option, considering potential tax implications and impacts on your estate.
Conclusion
Whether a viatical loan, a policy loan, or a viatical settlement is right for you depends on your specific needs and circumstances. Understanding all your options and consulting with professionals can ensure that you choose the best approach to manage your finances during a challenging time. If you’re considering a viatical settlement, companies like Harbor Life Settlements can provide a free policy evaluation to help you understand the value of your policy and explore your options.
