South Carolina Life and Health Practice Exam

What is the typical amount received for a life insurance policy in a viatical settlement?

1. Equal to the death benefit

2. Less than the death benefit

3. More than the death benefit

4. None of the above

The correct answer is: Less than the death benefit

In a viatical settlement, typically, the amount received for a life insurance policy is less than the death benefit. This arrangement occurs when an individual who is terminally ill sells their life insurance policy to a third party for immediate cash. The buyer becomes the new policyholder and is responsible for the premium payments. The amount offered in the viatical settlement reflects the present value of the death benefit, taking into consideration factors such as the insured's life expectancy, the policy's premium costs, and the health status of the insured. Because the buyer assumes the risk of paying premiums until the original policyholder passes away, the settlement amount will be less than the death benefit that the policyholder’s beneficiaries would receive, assuming they kept the policy until the end. This is why the typical amount in a viatical settlement is indeed less than the total death benefit of the policy.