Viaticals vs. Senior Settlements
Before continuing, it’s important to understand the growing dichotomy in the market for lifetime settlements: the difference between “viatical settlements” and “senior settlements”. While similar in many respects, there are important distinctions:
One obvious difference is the viator’s motivation to sell his or her policy. In a senior settlement, the viator may be looking to redeploy assets -- reinvestment of the proceeds may be a driving force. In viaticals, the viator is more likely to use proceeds to meet current expenses.
From the investors’ perspective, viatical settlements, accompanied by medical statements attesting to terminal illness, allow for more accurate projections of possible returns. “Senior settlements” dealing with medically "impaired" insureds have more fuzzy projections of life expectancy.
As we’ll discuss in detail later in the program, another difference between “viatical” and “senior” settlements is in the tax treatment of the settlement proceeds.
Government regulation usually develops in response to changing conditions -- that is to say, regulators are typically reactive, not proactive. State regulations, such as the NAIC’s Viatical Settlements Model Act, in some respects, regulate the market as it once existed, not necessarily how the market behaves today. And as the name implies, the Model Law focuses on “viatical” settlements, which as we’ve seen are becoming a smaller part of the overall secondary market in life policies.
With those distinctions in mind, let’s explore the prospects for viatical and senior settlements.
There are many reasons why a policyowner would sell an in-force policy in a viatical or senior settlement.
Viatical settlements have often been used to:
obtain needed medical care;
maintain independence by providing for living expenses; and
spend quality time with loved ones in the final days, such as taking a special vacation.
Senior settlements are typically motivated by other reasons, including:
to reinvest the settlement, because the original purpose for the life insurance no longer exists;
to purchase more cost-effective or appropriate insurance products, such as long term care or survivorship policies;
to update an estate plan;
to make intra-family gifts; and
to provide for favorite charities.
In other cases, the life settlement funds may be used by businesses to:
buy out the employer’s interest in another split-dollar life insurance policy;
begin a new business or expand existing operations;
buy back a business interest from a partner or stock from a co-stockholder; or
facilitate the transfer of the business.
Charitable organizations that own life insurance policies, usually as a result of a donation, may use a lifetime settlement to:
raise funds to meet immediate needs for daily operations or capital budgets, or
eliminate cash outlays to pay the premiums.