Define: Viatical Settlement

Quick Summary of Viatical Settlement

A Viatical Settlement takes place when a life insurance policy is sold to a third party, usually a capital company, in exchange for a lump sum of cash.

The viatical settlement will be sold at a percentage of the value of the policy, which varies from settlement to settlement, and the future premiums will be paid by the capital or funding company. To take advantage of such an arrangement, you must be chronically/ terminally ill and have a valid life insurance policy that has been in effect for at least 2 years.

You may choose to sell your viatical for any number of reasons, and the money that you receive is yours to use as you wish.

The capital or funding company will cover their expenses by re-selling your viatical to various investors who anticipate making a profit at the time the policy matures (your death).

The bright side is the large lump sum of cash. In the twilight of your life, you may wish to take an extended vacation, buy your children a house and see them enjoy it, or simply improve your standard of living.

A viatical settlement is an arrangement between the owner of an insurance policy (the viator) and a third party (the provider). The provider negotiates with the viator for the purchase of his/her life insurance policy or the beneficiary rights under that policy. The broker then solicits funds from investors. The funds are used to consummate the Viator provider purchase/sale agreement.

Viators are typically terminally ill people expected to die within 24 to 36 months. The viator receives a percentage of the face value of his/her life insurance policy. The viator may use the money for whatever he/she desires; typically, it is used to pay current medical expenses and fulfil last wishes. Upon the viator’s death, the investor or group of investors collects the value of the policy, less any deducted expenses involved in the investment. This money is then distributed to individual investors based on each’s percentage of investment.

A viatical settlement is a contractual agreement to provide a life insurance policyholder with immediate cash in exchange for the sale and transfer of life insurance policy ownership rights. Generally, viatical settlements appeal to insureds who are terminally ill and need the cash settlement to pay for living and medical expenses. However, viatical settlements may also be available to healthy insureds. Once the viatical settlement has been completed, the policyholder relinquishes ownership and control of the policy to the viatical provider, thus terminating the beneficiary’s right to collect the death benefit when the insured dies.

From an investment perspective, a viatical settlement is somewhat of a speculative transaction involving the anticipated and timely death of the insured person. Viatical settlement investments are considered a type of security.

Things to Consider Before Selling your Policy

Your existing life insurance policy may have a cash value or other non-forfeiture benefits that might be available to you.

• Selling or vitiating your policy may create a taxable event, resulting in tax consequences for you or your estate.
• Your future situation, circumstances and needs may change.
• You may deny your surviving family members desperately needed life insurance benefits by violating your insurance policy.
• Beware of unlicenced, unscrupulous and dishonest viatical settlement providers who might attempt to defraud you.
• If transaction funds and executed agreements are not properly escrowed, you may risk signing over the ownership of your policy without receiving any benefits.
• Life expectancy is an estimate of how long you may live. In actuality, you could live longer or die sooner, regardless of your current state of health. Accordingly, you should consider both scenarios and consider how you and/or your beneficiary might be affected by a viatical settlement.

As a New Investment Vehicle

Viatical settlements are fairly new. They were first publicly discussed as an investment vehicle in the mid-1980s and have only been widely available to the general public for the last three years.

While every investment carries with it the risk of loss due to fraud or otherwise, many investors who lose money to viatical settlement investments lose it because they were not given the full or correct information concerning its risks. Sometimes it is simply that the information was available but the investor did not ask. Regardless of the specific circumstances, there are several risks inherent in a viatical investment of which all investors should be aware. A well-informed investor is a prepared investor.

Important Risks

Factors that should be considered before investing:

Rates of return may be projected but cannot be guaranteed

Since advances in science and medicine may increase a Viator’s life beyond that which can be foreseen,. So while a viatical company or salesperson might “guarantee” a particular rate of return on your investment, remember that the rate of return on investment in viatical settlements cannot actually be calculated since the longer a Viator lives, the lower the rate of return on your investment will be.

No one can accurately predict the life expectancy of a Viator.

This is true not only because of possible breakthroughs in treatments and cures for AIDS and cancer but also because of many other variables, such as the experience of the medical personnel making the prediction, the nature of the Viator’s illness, and if the Viator has AIDS, the definition of AIDS used by the viatical company.

Who will be responsible for paying the Premiums.

If the policy premiums are not paid, the insurance company will cancel the policy. Many viatical companies collect enough money from investors to cover the costs of paying premiums for the life expectancy of the Viator; however, it is important to address the issue of who pays the premiums when the Viator outlives his or her life expectancy.

Who will be responsible for paying the Premiums.

If the policy premiums are not paid, the insurance company will cancel the policy. Many viatical companies collect enough money from investors to cover the costs of paying premiums for the life expectancy of the Viator; however, it is important to address the issue of who pays the premiums when the Viator outlives his or her life expectancy.

Term insurance policies have unique risks.

A term policy is a policy issued for a definite period of time. If the victor outlives that time period, the insurance company will not pay the death benefit. If your investment is in a term policy, you should be aware of who will be responsible for renewing the policy when the term expires.

Group policies are also unique.

A group insurance policy is one that covers a specific group of individuals, such as the employees of an employer. These policies may be converted to individual policies; however, many group policies contain restrictions for such a conversion. If Viator’s policy was converted from a group policy, any restrictions may pose problems for investors. A typical example is that the group policy premiums may be lower than those of the converted individual policy.

Most policies have a contestability clause.

A contestability clause allows the insurance company to “contest” the policy if a claim for benefits is made within two years of the policy’s effectiveness. Contesting the policy means that the insurance company believes there is a legal justification to deny the claim for benefit payments. Legal justification may be the victim’s death. The insurance company will not pay the benefits if the viator dies within the contestability period AND the insurance company believes it has such justification to cancel the policy.

Disclaimer

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 9th April 2024.