Viatical Settlements -- Market


Viatical settlements have often been used to provide needed medical treatment, to produce income, or to cover end-of-life expenses.

When we examine the income taxation of viatical settlements, we will see that tax-free viatical settlements to terminally ill individuals are limited to those with a life expectancy of 24 months or less. Despite this limitation, viatical companies sometimes purchase life insurance policies insuring individuals considered terminally ill who have life expectancies of up to 60 months.

The industryís newness and lack of organization make it difficult to determine the size of the viatical market exactly. Nonetheless, a recent study has estimated that during the 1990s, $1 billion worth of life insurance policies were sold to viatical settlement companies, not including senior market settlements. That means that the current market for viatical settlements is at least $100 million annually, and probably much more than that.

Although the early viatical settlement market included a large number of viators afflicted with AIDS, medical and pharmacological advances (including the introduction of protease inhibitors and so-called drug cocktails) have significantly lengthened the life expectancy of many AIDS sufferers. As a result of this longer life expectancy, people with AIDS no longer constitute the majority of individuals selling their life insurance policies to viatical settlement companies.

We have seen that viatical settlement companies will purchase life insurance policies covering terminally ill insureds, but exactly what kind of life insurance policies will they buy? The answer is, at first, somewhat surprising: They will buy virtually any life insurance policy underwritten by a major life insurance company, including:

whole life policies
universal life policies
convertible term life policies
group life certificates

Despite this general openness, there are a number of guidelines and preferences that viatical settlement companies appear to have. In the case of term life insurance policies and group life insurance certificates, the viatical settlement companies want to be sure that the coverage will not expire prior to the insuredís death. That means, of course, that the viatical settlement company will normally convert the purchased term policy or group certificate to a permanent life insurance policy. Accordingly, term or group coverage must include a conversion feature.

In addition, viatical settlement companies seem to prefer to purchase universal life insurance policies. Although there are few reasons given for this apparent preference, it is likely that the premium flexibility that is a hallmark of universal life insurance (and the additional flexibility this also gives the investor) is the cause for this preference.

Reagrding ownership of the policy, viatical settlements most commonly are arranged if the insured is the also the policyholder, but this is not always the case.  The policy might be owned by a spouse or other family member -- or the policy might be held by a trust or another fiduciary.  The only requirement in a viatical settlement is that the insured is terminally ill and the policyholder is willing to sell the policy.