Historically, policy owners of permanent insurance had very limited options when they no longer needed their coverage or needed funds due to financial difficulties. Their only market was the life insurance carriers, through which they could either take distributions from their cash value or surrender the policy. With respect to term life insurance, the only option was to surrender the policy and receive back any unearned premium. Today, however, policy owners have many more options. A significant reason for this is the development of a secondary market in which life insurance policies can be sold to viatical and life settlements companies. Another reason is the creation of terminal illness, chronic illness, critical illness, long-term care, and other policy riders which enable the policy owner to accelerate the policy death benefits.
Viatical and life settlements are similar in that they both involve the sale, by the policy owner, of his or her life insurance policy to a third party (typically a viatical or life settlement company) in exchange for a lump-sum cash payment. Once the buyer has purchased the policy, it then takes over the premium payments and collects the death benefit when the insured passes away.
What makes viatical and life settlements different is the life expectancy of the insured to whom the policy is being sold.
- With a viatical settlement, the insured (the viator) typically has a life expectancy of less than two years due to a life-threatening disease or terminal illness. However, some viatical settlement companies will purchase policies from insureds with life expectancies of up to five years. The policy owner receives a one-time payment that usually ranges from 50 percent to as much as 90 percent of the policy’s face value. Generally, the shorter the insured’s life expectancy, the greater, the purchase price will be. It should be noted that viatical settlements gained popularity in the late 1980s and early 1990s as a result of the AIDS epidemic and the need of terminally ill insureds to obtain funds for health care purposes.
- Life settlements, on the other hand, are available for insureds with longer life expectancies (generally up to fifteen years, although from a practical standpoint it may be difficult to receive an offer that exceeds the cash value for life expectancies greater than eleven years or so). Unlike viatical settlements, the insureds generally are not terminally or chronically ill. Due to the longer life expectancy of the insured, payments for life settlements are typically substantially lower than for viatical settlements—the average life settlement value is around 20 percent of the policy face value. Life settlements gained popularity in the 2000s, primarily in the older age market for seniors who no longer had a need for continued life insurance coverage.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM