Terminally-ill life policyowners may sell their policy at a discount to a third party. This type of agreement is called a

• A. Viatical settlement
• B. Life settlement
• C. Policy loan
• D. Surrender

Answer: (A)

Viatical settlement. This is the arrangement where a policyowner who is terminally ill sells the life insurance policy to a third party for a cash sum that is usually less than the death benefit. The buyer becomes the new owner and pays future premiums, and the death benefit goes to the buyer when the insured dies. The key idea is the terminal illness and the sale of the policy to another party for cash.

This differs from a life settlement, which involves selling a policy by someone who is not terminally ill (often an older person) to a third party. A policy loan is borrowing against the policy’s cash value, not selling the policy. Surrender means giving up the policy in exchange for its cash surrender value, ending the coverage.