Viatical settlement is a method for an insured person with an abbreviated life expectancy to "cash out" of a life insurance policy before death. An investor would buy a life insurance policy of a terminally ill person at a price that is less than the death benefit of the policy. When the seller dies, the investor collects the death benefit. The return depends on the seller's life expectancy.
Viatical settlements can be risky investments and are often pushed on investors by salespeople who are paid large commissions. Generally, viatical settlements involve insured individuals with a life expectancy of less than two years. The return on a viatical investment depends upon the seller’s life expectancy and the actual date he or she dies. If the seller dies before the estimated life expectancy, the investor will receive a higher return. But if the seller lives longer than expected, the investor’s return will be lower, and the investor can lose part of the principal investment if the person lives long enough that the investor has to pay additional premiums to maintain the policy. In addition to losing the principal investment, investors may also lose the penalty they paid for cashing in a policy early.