Indiana State Life and Health Insurance Practice Exam

S entered into a written agreement to receive immediate cash in exchange for her life insurance policy. What is this agreement called?

1. 1035 Exchange

2. Viatical Settlement

3. Equity Cash Agreement

4. Cash Conversion

The correct answer is: Viatical Settlement

The agreement where an individual receives immediate cash in exchange for their life insurance policy is known as a viatical settlement. This arrangement typically involves the policyholder selling their life insurance policy to a third party for a lump sum that is less than the death benefit but greater than the cash surrender value. This option is often utilized by individuals who are terminally ill and need cash to cover medical expenses, making it a practical financial strategy for accessing funds when faced with such circumstances. The other terms in the choices relate to different concepts in insurance and financial planning. For instance, a 1035 exchange specifically refers to a tax-free exchange of one life insurance policy for another or for an annuity, which does not involve immediate cash payment in the same way. An equity cash agreement may suggest a financial arrangement involving a loan secured by the equity of a policy but is not a recognized term in the context of selling a life insurance policy. Cash conversion is not a standard term in the insurance industry and may refer to the process of surrendering a policy for cash but does not reflect the broader structure of viatical settlements. Therefore, the correct terminology for the scenario described is indeed a viatical settlement.