What are Viatical Settlements?
The Viatical Settlement industry took its name from a Latin word, viaticum, which means provisions for a journey.
For terminally ill people Viatical Settlements mean Cash for the Final Days. Viatical Settlements are cash lump sums given to terminally ill people (viators) in exchange for the death benefits of their life insurance.
For Investors, Viatical Settlements mean potential for great profit while doing good for someone in need.
The Ideal Investor
Viatical investments are not appropriate for everyone
The Ideal Investor
1. Investor has no need for liquidity
2. Investors has a well diversified portfolio
3. Investor is aware that this should be considered a long-term investment
4. Investor is aware of and comfortable with the risks
A viatical settlement is a lump sump of cash given to terminally ill people (viators) in exchange for the death benefits of their life insurance. Along with so much of the English language, the name has its origins in a Latin word, viaticum, which means provisions for a journey.
These settlements are attractive to a viator (seller) because the person gets a significant amount of money that will ease the financial stress of their final days. Viatical settlements are attractive to investors for their potentially high -- but not guaranteed -- rates of return.
The way it works in the simplest case is the investor pays some percentage of the face value of the policy, let's say 50% just to pick a number, and in return becomes the beneficiary of the policy. The investor is then responsible for paying the premiums associated with the life insurance policy. Upon the demise of the viator, the investor receives the death benefit of the life insurance policy. If the viator dies shortly after the transaction is completed, the investor makes a large amount of money. If the viator survives several years past the predicted life expectancy, the investor will lose money.
Like any other deal, there are risks to both parties. For the viator, the main risk is settling at too low a price. For the investor, there are risks of not receiving the full death benefit if the insurance company goes bankrupt, not receiving any death benefit if the insured committed fraud on the insurance application, etc.
Who invented viatical settlements?
Is this legal?
Can this process be performed with every policy?
What about the insurance companies?
How does the general public feel about this program?
What about the taxes?
Do viatical settlements entail risk?
Viatical settlements have existed almost as long as the insurance industry itself. It wasn't until recently, with the advent of the AIDS epidemic, those companies began to offer them to the public. Before the epidemic, people only arrange viatical settlements privately between family and friends.
Yes, the United States Supreme Court ruled that life insurance is a form of personal property and should be freely transferable. In the case of Grisby vs. Russell, the ruling permits the insured to dispose of their human life value with the same freedom they may exercise in disposing of their property at death.
No. The companies do a thorough verification of the insurance coverage prior to offering a policy for purchase. Unfortunately, some policies do not meet their criteria.
Today, as a result of viatical settlements, insurance companies are rushing to meet the needs of the terminally ill by creating and offering Living Needs programs. A Living Needs program works in much the same manner as our transactions. To date, most carriers still offer these programs, and of the existing programs, they tend to remain less attractive to viators. Most often, the requirements of each carrier are usually too difficult.
While some feel the program from an investor standpoint, is opportunistic, national associations that represent the terminally ill have often acknowledged the positive aspects of our program and its value as a financial resource. Furthermore, a recent survey conducted by the National Association of People with AIDS concluded that the number one concern of people with AIDS is financial. Relieving the financial stress associated with a terminal illness should be viewed as one of the most rewarding aspects of this industry.
Once the purchaser acquires the policy with the objective or receiving a profit, the IRS looks at the transaction as a business enterprise and applies tax to the gain received on the policy. If the gain is recognized in an IRA, an exception to the rule occurs.
With all investment, there is a risk. But, unlike traditional investments, the purchase of life insurance policies actually minimizes risk. The Viatical Settlement Companies take every possible step to identify potential risks and remove them prior to your investment. They do this by only purchasing policies from A- or better rating by A.M. Best Insurance Rating Guide. As an added security for the policy in question, most states provide a guarantee fund for the protection of policyholders in case the carrier falls below rating standards.
To address the possibility of a person living beyond the actual expectancy, be assured the payment is not at risk. Should this event occur, the only risk possible is a change in yield. Yield may gradually diminish over an extended period of time.
Other risks, such as liquidity, may also affect your decision to purchase a viatical settlement. When questions of this nature arise, The companies encourages you to seek professional advice before you decide to purchase. On a positive note, viatical settlements are never effected by market or interest rate risk, thereby giving you a much higher rate of return.
Deal with companies that have met only the highest level of investigation. These qualifications include among other things:
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A strong medical review team with active doctors
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An escrow agency will a long history of dealing with viatical settlements
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Quick placement
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Companies that use only A-rated or better non-contestable policies
There are programs now enabling individuals, businesses, and other organizations to sell life insurance policies they currently own, but no longer need, for an amount greater than the cash surrender value.
As an alternative to surrendering a policy, this innovative service allows policy-owners to receive the greatest value from an asset they no longer wish to maintain.
The Benefits of Viatial Settlements
Here is a look at some of the ways organizations and individuals can benefit by selling a policy they no longer need.
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Allows individuals to receive more than the cash value surrender of a policy
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Creates current liquidity from a dormant asset
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Provides funds that can be utilized in other financial instruments
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Eliminates costly premiums on a policy that is no longer needed.
Policy Criteria
Insurance companies look at several factors when considering the purchase of a policy.
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Policy Face Amount
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Policy Type
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Other Considerations
They take into consideration the insured's age, health factors, length of policy ownership, premium payments and cash value of the policy.
Viatical Settlements Frequently Asked Questions
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In what situations should I consider selling a life insurance policy?
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Do I need to be terminally ill to sell my life insurance?
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Are there any restrictions on the use of the proceeds?
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What type of life insurance policy can I sell?
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Is there a limit to the size of the policy I can sell?
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Do I have to sell my entire policy?
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What are the tax implications of this transaction?
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Who pays the premiums?
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Can a purchase be made even if it has loans against it?
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With whom should I confer regarding my decision to sell my life insurance policy?
Q: In what situations should I consider selling a life insurance policy?
A: Although every individual's needs are unique, the following situations exemplify circumstances when you may consider selling an existing life insurance policy:
Selling your business
The policy you purchased to finance a buy/sell agreement is no longer needed after the business has been sold to a third party. You or your business owns a keyman policy that, because of a change in ownership, is no longer necessary.
Charitable Organizations
A not-for-profit organization can sell a gifted policy to supplement its current cash flow.
Re-examining Corporate-Owned Life Insurance (COLI)
Your business owns a key-man policy on an executive who is no longer employed there. A recent change in tax law has made some leveraged COLI programs uneconomical. Your company owns policies purchased to fund deferred compensation or retiree benefit programs, after such programs have been changed.
Addressing Changes in Your Estate Planning Needs
Your estate size has been decreased or the tax policy has changed, reducing the insurance required to pay projected estate taxes. You have had a change in financial condition, and the premiums on your policy are no longer affordable. You outlive your family or beneficiaries.
Q:Do I need to be terminally ill to sell my life insurance?
A: NO. Companies routinely purchases life insurance policies from older individuals with normal life expectancy.
Q:Are there any restrictions on the use of the proceeds?
A: NO. Proceeds can be used for any purpose. Here are some of the options you may want to consider:
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Fund the purchase of a survivorship policy
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Buy back stock from a partner or stockholder
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Purchase additional securities, mutual funds or annuities as long-term investments
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Pay for long-term care insurance or other asset protection tools
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Fund a charitable gift, charitable lead trust, charitable remainder trust or gift annuity
Q: What type of life insurance policy can I sell?
A: Companies can purchase virtually any type of policy from any carrier, including individual term, whole and universal life, as well as corporate-owned policies and policies held in irrevocable life insurance trusts.
Q: Is there a limit to the size of the policy I can sell?
A: NO. The typical "High Net Worth Transaction" policy has a death benefit of around $1 million, but they routinely purchase policies worth significantly more.
Q: Do I have to sell my entire policy?
A: NO. Companies can purchase any portion of the policy you desire and keep the remaining death benefit in the name of the original beneficiary.
Q:What are the tax implications of this transaction?
A: Typically, any amount paid for a policy in excess of the cash surrender value is treated as a capital gain.
Q: Who pays the premium
A: The purchasing Company will assume all premium obligations.
Q: Can purchase a policy even if it has loans against it?
A: YES. They simply factor any loan obligations in our purchase price.
Q: With whom should I confer regarding my decision to sell my life insurance policy?
A: I recommend that clients speak with their tax advisor - or perhaps their estate planner when considering the sale of their policy.