Colorado Life Producer License Practice Test

What characterizes a viatical settlement?

1. Sale of the insured's vehicle for cash

2. Sale of the death benefit at a discounted rate

3. Transfer of policy ownership to the insurer

4. Loan against the value of the policy

The correct answer is: Sale of the death benefit at a discounted rate

A viatical settlement is characterized by the sale of the death benefit of a life insurance policy at a discounted rate. This financial arrangement typically involves a terminally ill policyholder who sells their policy to a third party in exchange for an immediate lump sum. The third party then becomes the beneficiary and receives the full death benefit when the policyholder passes away. This option accurately reflects the essence of a viatical settlement, as it highlights the transaction between the policyholder and the buyer, focusing on the benefit being sold rather than the policy itself. It allows the policyholder to access funds while they are still alive, which can be crucial for covering medical expenses or other financial needs during their remaining time. The other options describe different concepts not related to viatical settlements, such as vehicle sales, transfers of ownership to insurers, or loans against policy values, which do not capture the specific mechanics of a viatical settlement.