Using a life insurance policy to pay for medical care
A change in health can increase what buyers will pay for a policy — and may open a different route entirely.
Medical costs are one of the most common reasons people contact us. A diagnosis, a surgery, an ongoing treatment regimen — the expenses arrive faster than most people plan for. A life insurance policy that has been sitting in a drawer for years may be one of the most valuable assets available to help cover those costs.
How health affects what a policy is worth
In the secondary market, a change in health since the policy was issued typically increases what buyers will pay. Buyers are pricing the expected time until the death benefit is paid. A shorter life expectancy means a higher price. This is counterintuitive — the worse the health situation, the more valuable the policy may be to a buyer. A policy that would not have qualified for a life settlement five years ago may qualify today.
When a viatical settlement applies
If the insured has been diagnosed with a terminal illness — typically defined as a life expectancy of 24 months or less — the transaction is called a viatical settlement rather than a life settlement. Viatical settlements typically return a higher percentage of the death benefit than standard life settlements, and the proceeds are generally excluded from federal income tax when the insured is terminally ill. This is a significant difference.
Chronic illness
Chronic illness — conditions that limit two or more activities of daily living, or require substantial supervision due to cognitive impairment — can also qualify a policy for a viatical settlement under certain conditions. The specific criteria depend on the state and the buyer. If there is a chronic illness diagnosis, it is worth asking whether the viatical route applies.
Effect on Medicaid and public benefits
Receiving a lump sum from a life settlement or viatical settlement can affect eligibility for Medicaid and other means-tested programs. If the insured or their family relies on these programs, this needs to be evaluated carefully before any sale. A special needs trust or structured settlement may be worth exploring with a benefits advisor.
A diagnosis changes the calculation.
If there has been a significant change in health, tell us. It may mean the policy qualifies for a viatical settlement rather than a standard life settlement — with a meaningfully higher payout.
Find out what the policy is worth now.
One conversation is usually enough to tell you whether the situation qualifies and what route makes the most sense.