What is a viatical settlement?

A viatical settlement refers to the process where a policyholder sells their life insurance policy to a third party for a lump sum cash payment that is less than the death benefit but more than the cash surrender value. This typically occurs when the policyholder is facing terminal illness and needs immediate cash for medical expenses or other needs.

Choosing the option that defines it as an agreement to sell a life insurance policy to an unrelated person accurately captures the essence of a viatical settlement. In this arrangement, the buyer, who is usually an investor or investment firm, becomes the new beneficiary of the policy and is responsible for paying future premiums. When the original policyholder passes away, the new owner receives the death benefit.

This mechanism provides liquidity to individuals who might otherwise face financial difficulties due to a terminal condition, making the correct answer essential for understanding the practical application and purpose of viatical settlements in the life insurance industry.