- What are viatical settlements?
- August 9, 2013
Initially, back in 1989, the viatical business began with good intentions, as a method to allow terminally ill AIDS patients early access to a portion – or all – of their life insurance policy’s death benefits.
Eventually, viaticals expanded to include other conditions such as cancer, heart disease, and any other life-threatening illness.
People living with a terminal illness are often faced with very tough financial decisions; fortunately, selling their life insurance policy for a viatical settlement can help ease some financial worry.
So, how do viatical settlements work?
The owner of the policy sells it for a percent of the death benefit. The buyer becomes the new owner and/or beneficiary of the life insurance policy, pays all future premiums and collects the entire death benefit when the insured dies.
The industry has been troubled by a high number of unethical, illegitimate operations. These operations have gone after potential violators in an aggressive manner. These companies have given the industry a bad name and led to more regulations.
Most people confuse viatical settlements with life settlement. However, the fundamental difference between the two is that with viatical settlements in insured must be terminally ill while life settlements do not require this.
There are some common similarities among these settlements, which are:
-The person – generally has a terminal illness – selling the life insurance policy is the viator and they will receive money from the settlement. This person gives up ownership of the policy in return for cash now.
-A settlement provider is the person or company that buys the life insurance policy. The buyer becomes the policy owner and takes on all the responsibilities and benefits of the policy.
-The person or company who represents the seller and can “shop” for offers is a settlement broker. The buyer pays the broker a commission if the sale is complete.
-An accelerated death benefit (ABD) is a feature of a life insurance policy that typically pays some or all of the policy’s death benefit before the insured dies, which is another way of getting cash from a policy without a third part.
In order to sell your life insurance policy for a viatical settlement, you must have a terminal disease and an estimated life expectancy of 36 months, or less, although there are some companies that will buy policies from people with greater life expectancies, such as 60 months.
Nowadays, viatical settlements are no longer just for AIDS patients. More and more companies are expanding to terminally ill cancer and heart patients or to those suffering from other fatal diseases.
Many different policies can be sold, including whole life, term and universal life.
In many cases, group policies also can be sold – for instance, if a disability waiver locks in coverage, and the policy is assignable or convertible. However, you will need to check specifics with the company.
In addition, policies need to have been in-force beyond any contestability period, usually two years. Group policies must not require a new contestability period.
To sell a life insurance policy, your financial adviser may be able to assist you, keep in mind that they will receive a fee or commission on the sale of a percentage of either the cash value or the death benefit, typically five to seven percent.
However, you may also choose to approach viatical financial companies directly. Make sure that you get offers from more than one, and do not be afraid to negotiate.
Check whether or not your state insurance department has licensing and other requirements for funding or brokerage companies to conduct business in that state; currently only a few states do.
The number of states that do, however, is growing quickly. It’s important to check to see whether your company is properly licensed. Otherwise, you might get hit with unnecessary taxes.
The company must be licensed in the state where it is making the transaction, not where it is located.
For example, if a company is based in California but does business in New York, it must be licenses in New York. That means that you should do business only with companies that comply with the National Association of Insurance Commissioner’s Model Act and Regulations on viatical settlements.
Keep in mind that you do not need to sell the entire policy. You can sell whatever percentage you would like – the company may have a minimum as a purchase requirement.
The amount you receive will depend on a variety of factors, such as anticipated life expectancy (the shorter it is, the higher the payout), the anticipated premiums the company will have to pay, if there are any loans, the insurance company’s rating, interest rate, and the company’s targeted rate of return.
A life expectancy of six months or less typically brings about 80 percent of the policy’s death benefit, although sometimes it can be as high as 85 percent. On the other hand, a life expectancy of 60 months would bring 25 to 30 percent.
If you have a cash value in the policy, you can usually withdraw it.
The process typically takes four to eight weeks to viaticate a policy, although it can take longer, especially with some group policies.
You can help speed things up by notifying your physician and insurance company to expect the inquiries from the viatical company.
The lump sum payout could result in the loss of state and federal need-based aid such as Medicaid, food stamps or SSI.
Depending on your financial situation, specifically if you a lot of money to hospitals, doctors, or other creditors, they may seek payment from the proceeds you receive. Also, if you file for bankruptcy, the creditors lay claim.
The viatical company normally will not contact you after settlement, but they will track your status so it known when the policy “matures” – that is, when the viator dies and the policy becomes payable.
If you live past your anticipated life expectancy, there are no repercussions for you; that is part of the risk for the company.
As like any other big decision, you should shop around to make sure that you are getting a fair price. This is a type of transaction that you can negotiate with companies, since there is usually no set price.
About Tony Steuer
Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.