Viatical Settlement

A viatical settlement is a financial arrangement where a terminally ill policyholder sells their life insurance policy to a third party at a discounted rate from its face value. This arrangement allows the policyholder to access a portion of the death benefit while they are still alive, providing them with immediate financial support for their medical bills, living expenses, and other costs associated with their terminal illness. The purchaser of the policy, often referred to as the viatical settlement provider, then becomes the new beneficiary of the policy and assumes responsibility for paying the remaining premiums. Upon the policyholder’s death, the purchaser collects the full death benefit from the insurance company.

Historical Background

Viatical settlements emerged in the United States during the 1980s, primarily as a response to the AIDS epidemic. Many individuals with AIDS faced significant financial challenges due to their inability to work and the high cost of medical treatments. To alleviate some of these burdens, they began selling their life insurance policies for a percentage of the death benefit, providing them with necessary funds to cover expenses and improve their quality of life during their remaining time.

Regulations and oversight of the viatical settlement industry have evolved significantly since its inception. Initially, the industry was relatively unregulated, which led to potential risks for both policyholders and investors. However, in response to concerns about consumer protection and fraudulent practices, many states in the U.S. have since implemented regulations to govern viatical settlements and ensure fair practices.

Key Players

Policyholders: These are individuals with a life insurance policy who have been diagnosed with a terminal illness and have a life expectancy of typically two years or less. They seek to access the value of their policy to manage medical and living expenses.
Viatical Settlement Providers: These are companies or individuals who purchase life insurance policies from terminally ill policyholders. They typically offer a percentage of the policy’s face value, customarily ranging from 50% to 80%, depending on various factors including the insured’s life expectancy and the policy details.
Investors: In some cases, the viatical settlement market includes investors who purchase these policies from the providers. These investors anticipate earning a profit when the insured individual passes away, and they receive the full death benefit minus any remaining premium payments and costs.
Insurance Companies: These entities initially issue the life insurance policies and are responsible for paying out the death benefits to the policyholder’s beneficiaries, or in the case of a viatical settlement, to the viatical settlement provider or investor who purchases the policy.

Process of a Viatical Settlement

Evaluation: The policyholder contacts a viatical settlement provider to express their interest in selling their life insurance policy. The provider evaluates the policy, including face value, type, and the insured individual’s medical prognosis to determine the offer.
Offer: If the provider decides to proceed, they make an offer to the policyholder. This offer is often a lump sum payment that represents a percentage of the policy’s face value.
Acceptance: The policyholder reviews the offer, and if agreeable, they accept the terms. This acceptance typically involves signing a viatical settlement contract.
Transfer: Upon acceptance, the ownership of the policy is transferred from the policyholder to the viatical settlement provider. The provider assumes responsibility for paying any future premiums.
Payout: The policyholder receives the agreed lump sum payment.
Death Benefit Collection: Upon the death of the insured, the viatical settlement provider or investor contacts the insurance company to collect the full death benefit.

Regulatory Framework

In the United States, the regulation of viatical settlements is primarily handled at the state level. Some of the key regulatory measures include:

Licensing Requirements: Viatical settlement providers and brokers are often required to obtain a license to operate in many states. This ensures that they meet certain standards of practice and ethics.
Disclosure Requirements: States typically require full disclosure to the policyholder about the terms of the viatical settlement, including the amount they will receive, any fees involved, and the process of transferring policy ownership.
Consumer Protections: Many states impose consumer protection regulations to safeguard policyholders, such as ensuring confidentiality, providing rescission periods, and requiring transparency in the transaction.
Fraud Prevention: To mitigate fraudulent activities, regulations often include measures to verify the authenticity of medical records, the legitimacy of life insurance policies, and the good faith of viatical settlement providers and brokers.

The National Association of Insurance Commissioners (NAIC) has also developed a model Viatical Settlements Act to standardize and guide state regulations.

Financial Implications

For policyholders, a viatical settlement offers several financial advantages:

Immediate Funds: Accessing the value of a life insurance policy while still alive can provide crucial financial support, easing the burden of medical and daily living expenses.
No Future Premiums: After selling the policy, the policyholder is relieved of the obligation to pay future premiums, which can be significant especially if financial resources are limited.

For viatical settlement providers and investors, the key financial incentives include:

Potential Profits: By purchasing policies at a discount and collecting the full death benefit upon the insured’s death, providers and investors can realize substantial returns.

However, there are also risks to consider:

Longevity Risk: If the policyholder lives longer than expected, the purchaser must continue paying premiums, reducing the net profit.
Legal and Regulatory Risks: Changes in regulation or legal challenges can impact the ease of doing business and the profitability of viatical settlements.

Ethical Considerations

The viatical settlement industry raises several ethical concerns:

Exploitative Practices: Critics argue that these arrangements can be exploitative, taking advantage of vulnerable individuals in desperate financial situations.
Confidentiality: Ensuring the confidentiality of the policyholder’s medical and personal information is paramount. Breaches of confidentiality can cause additional stress and harm to the policyholder.

Despite these concerns, proponents argue that viatical settlements offer a necessary financial tool for those facing terminal illness, allowing them to maintain dignity and improve their quality of life.

Viatical Settlements vs. Life Settlements

It is important to distinguish between viatical settlements and life settlements. While both involve selling a life insurance policy, the primary differences lie in the condition of the policyholder and the expected payout:

Viatical Settlements: These are specifically for terminally ill individuals with a limited life expectancy. The payout tends to be higher due to the shorter expected duration of premium payments.
Life Settlements: Life settlements are for older individuals (usually seniors) who are not necessarily terminally ill but still wish to sell their life insurance policies. The life expectancy of the insured is typically longer, resulting in a lower payout compared to viatical settlements.

Conclusion

Viatical settlements provide a crucial financial lifeline for terminally ill individuals, allowing them to access the value of their life insurance policies to cover immediate expenses. While the industry presents both significant benefits and considerable risks, understanding the detailed process, regulatory environment, and ethical implications can help stakeholders make informed decisions. As with any financial arrangement, careful consideration and due diligence are essential to navigate the complexities and harness the potential benefits of viatical settlements.

For more information on companies involved in viatical settlements, one may visit the websites of prominent viatical settlement providers such as Life Insurance Settlements, Inc. (LISI) or The Coventry Group, which offer detailed insights into their processes, services, and ethical standards.