Viatical Settlement -- Prospects

Now that we have looked at the viatical market overall, let’s look at the individuals who make up that market: the prospects.

Who is a prospect for a viatical settlement? The first requirement is that he or she owns a policy under which a terminally ill individual is insured. In most cases, the terminally ill insured will also be the policyowner, although that is not always the case. Although some viatical companies will purchase a life insurance policy covering a terminally ill insured with a life expectancy of as long as 60 months, income tax free viatical settlements require that the insured have a life expectancy not exceeding 24 months.

The primary motives for viatical settlements are:

obtaining needed medical care;
paying bills;
maintaining independence by providing for living expenses; and
taking a special vacation with a loved one.

Unlike the prospects for senior settlements, the viatical settlement prospect does not need to be an older individual. He or she may be quite young as, in fact, were many of the AIDS-afflicted viators.

In general, the viator considers the current need for funds to outweigh the future needs of the policy beneficiary after the insured’s death. Once the life insurance policy has been viaticated, the death benefits become payable to the investor rather than the former policy beneficiary.

Often the terminally ill individual will have mounting medical expenses and may have lost his or her source of income, so that the viatical settlement can become a lifeline at a period of great financial need.

Other sources of funds (for example, accelerated death benefits paid by the life insurer) may be unavailable to the viatical settlement prospect. Even if accelerated death benefits are available under the life insurance policy, a combination of accelerated death benefits and viatication may produce the largest total settlement for the viator.

Finally, although viatical settlement companies have purchased smaller life insurance policies, some companies insist that a life insurance policy exceed a certain minimum ($100,000, for example) before the company will consider purchasing it under a viatical settlement.

Although viator and settlement company negotiate the terms of the settlement contract, the NAIC's Viatical Settlements Model Act provides standards for settlements in order to help ensure that viators receive a reasonable return for viaticating a life insurance policy. The rather simplistic standards listed in the Model Act were developed at a time when lifetime settlements were primarily “viatical settlements” -- the insured was diagnosed with a terminal medical condition.  These standards are less appropriate in the case of “senior settlements”, in which estimated life expectancies are much longer and less certain.  In the case of viatical settlements, the Model Act does allow payouts to be adjusted slightly downward for lower-rated life insurers:

Insured’s Life Expectancy
Minimum Percentage of Face Value* Paid to Viator
Less than 6 months
80%
At least 6 but less than 12 months
70%
At least 12 but less than 18 months
65%
At least 18 but less than 24 months
60%
24 months or more
50%
*  face value of policy less any loans or liens


Although there is considerable flexibility in negotiating viatical settlements, under the NAIC's Viatical Settlements Model Act a viator with a 6-month life expectancy and a $100,000 life insurance policy might look forward to a viatical settlement of at least $80,000. The Model Act states that the settlement percentage may be reduced by 5 percent for policies underwritten by life insurance companies rated lower than the four highest categories by A.M. Best or similarly rated by another rating agency. Based on that guideline, a life insurance policy of the same face amount issued by a C-rated life insurer might result in a settlement of $75,000 instead of $80,000.

Similarly, a viator with a 30-month life expectancy and a $250,000 life insurance policy might expect a $125,000 viatical settlement for a high-quality policy (or $112,500 for a lower-rated insurer.)


EXAMPLES:

Meeting Daily Needs

From Consumer Reports ® : "Arline Maisel, her three brothers, and two sisters despaired when they learned in mid-1997 that their dad, stricken with prostate cancer, had six months to live. With three children still at home to support, Hank Maisel, 61, was too ill to work, and a failed business deal had left him broke. "He was only a few payments away from losing the house," says Arline. By selling half of Hank's only asset, a $500,000 term-life insurance policy, however, the Maisels were able to raise enough after the viatical company pocketed its $59,000 share of the proceeds to meet medical expenses and clear up debts. Hank died in 1999, and, says Arline, "I am convinced he lived an extra year thanks to the money." "



Using Viatical Settlements to pay for Long Term Care

From a law firm specializing in estate planning and care of the elderly:  "We had a client's family approach us two years ago about their father. The father was in his mid-seventies. His funds were being rapidly depleted for long term care. Due to a stroke, the father had been residing in a long term care facility for the five preceding years. He owned a whole life insurance policy with a $750,000 death benefit, but he was still required to pay substantial premiums to keep the policy in force. His family was ready to let the policy lapse. There was no cash surrender value because dad had already taken out policy loans to the maximum extent.

We advised the family that they might be able to "sell" the policy to a company that would pay cash for it. A viatical settlement was arranged and the client received a check for $170,000, and did not have to repay the policy loan. This was a windfall to the family because they thought they were going to surrender the policy. As it turned out, the client died about two years later."