Some private businesses are willing to buy the insurance policies of people who are terminally ill. They purchase a policy at less than its face value, with the amount varying according to how long you are expected to live. These are called viatical settlements.
Under FEGLI, meanwhile, anyone who is terminally ill and has a life expectancy of nine months or less to elect a “living benefit.” In effect, it’s an accelerated payment of Basic life insurance benefits to the policyholder, rather than to a beneficiary or survivor.
There are important differences between the government’s living benefit program and the private sector’s viatical settlements. For example, a federal employee can only cash in his Basic insurance and then only when he is expected to live no longer than nine months. In the private sector, viatical settlements can be made with individuals whose life expectancy is greater than that.
You can only elect a living benefit once and that election can’t be reversed. However, if you are an employee, you have the ability to decide how much of your Basic insurance you want to cash in. While retirees can only elect a full living benefit in which they cash in their entire Basic policy, employees may elect a partial living benefit, which can be done in multiples of $1,000. With a full living benefit, you would no longer pay any premiums. With a partial benefit, your premiums would be reduced.
Obviously, if you are eligible for a FEGLI living benefit, the amount you receive will be less than the face value of your policy because you are being paid in advance. However, unlike a viatical settlement, there isn’t any profit margin included in a living benefit. As a result, the amount you receive will usually be greater than that offered by a viatical settlement firm.