Montana State Life Insurance Practice Exam

Which is NOT a potential consequence of entering a viatical settlement?

1. Proceeds may be taxable.

2. It can adversely affect Medicaid eligibility.

3. It guarantees a higher life insurance payout.

4. Can be subject to claims of creditors.

The correct answer is: It guarantees a higher life insurance payout.

Entering a viatical settlement involves selling a life insurance policy for a lump sum that may be less than its face value but more than the cash surrender value. One key aspect of viatical settlements is that they do not guarantee a higher payout than what the policyholder would receive otherwise. In fact, the proceeds from a viatical settlement are typically less than the total death benefit, as they reflect the present value of the expected payout based on the insured individual's life expectancy. This settlement option is often pursued by individuals needing immediate funds for terminal illnesses or other urgent financial situations. The other ramifications associated with viatical settlements, such as potential tax implications, impacts on Medicaid eligibility, and exposure to creditor claims, are real and can significantly affect the policyholder’s financial and personal situation. However, the notion that viatical settlements guarantee a higher life insurance payout is a misconception, as the settled amount is determined based on various factors, including the insured's health and life expectancy.