The concept of viatical settlements works on the premise that a person with a terminal disease can sell his life insurance policy for less than the face value. The person can get lump sum cash and the buyer can collect the benefits of the policy after the original policyholder's death. It sounds a bit grim but then there are always the harsh aspects of life. The longer the life expectancy, the less expensive the policy. But then life rarely follows a logical road and so the element of risk is there if the original policy holder's life expectancy increases with the passage of time. It is after all a gamble on death. If the seller dies sooner than expected, you collect a higher return and on the other hand, if the person lives longer than expected, you will collect a lower benefit. Added to this is the fact that you can also end up losing your principal investment if the person lives long enough and you have to pay the additional premiums.
Given the above scenario, the question arises why opt for the viatical settlements. The advantage to the viator (seller) is that he can get lump sum settlements to ease the financial strains of his final days. The buyer gains, and here there is no guarantee, by becoming the beneficiary of the policy. The investor can buy the policy at a reduced rate of the actual face value, which can at times be 50% of the actual value. It then becomes his responsibility to pay the remaining premiums. Upon the viator's demise the buyer can collect the benefits. If the person survives beyond the expected time, the investor stands to lose upon the investment.
There is an element of risk involved for both the parties. The viator can end up selling the policy at too low a rate. The investor stands to lose if the viator outlives the predicted life expectancy. The investor also has to face the risk of the insurance company going bankrupt. There are also chances that the insured had committed some sort of a fraud while filling in the life insurance application and so the insurance company may not be in a position to pay up the benefits.