How do viatical settlements differ from accelerated death benefits?

Viatical settlements and accelerated death benefits serve unique purposes within the life insurance framework, and the key distinction lies in their funding sources. Viatical settlements are an arrangement where a third party purchases a life insurance policy from the policyholder for a cash payout that is less than the policy's death benefit. This typically occurs when the policyholder is terminally ill, and they need access to funds while still alive. This transaction is not managed by the insurance company itself.

On the other hand, accelerated death benefits are provisions within a life insurance policy that allow the policyholder to receive a portion of the death benefit while still alive, typically due to critical illness or terminal illness. This benefit is a feature of the policy provided by the insurer, meaning the payments or benefits come directly from the insurance company without involving a third-party buyer.

Understanding these nuances highlights that the statement identifying the funding source is accurate: viatical settlements rely on third-party financing, whereas accelerated benefits are provided through the insurance company's existing policy mechanisms. This distinction is crucial for comprehending the ways in which products are designed to meet the financial needs of policyholders at different life stages or circumstances.