Despite unfortunate scams, which prey on the greed of an investing public and the straitened circumstances of ailing insureds, the lifetime settlements provide an important and worthwhile service by making otherwise-unavailable funds available to ill or dying individuals.
Clearly, there are cases where viatication is appropriate. But what factors need to be considered to determine whether it is appropriate for a particular insured? That is, what are the suitability issues relating to the viatication of life insurance owned by terminally or chronically ill and retirement-age policyholders? Letís turn our attention now to the suitability issues surrounding viatication, including issues related to the suitability of any particular viatical settlement company. The focus of this discussion is from the viatorís (sellerís) point of view. For possible investors, thinking of investing in viaticated policies there are a different set of issues to address beyond the scope of this program.
A key issue relating to the suitability of viatication is whether the insured still has a need for the life insurance protection. He or she may have a spouse who will need income or children who may not have completed their education. In the case of a senior settlement, the insured may be able to obtain other insurance products. However, absent some miraculous cure, it is unlikely that a viator with a terminal illness will be able to purchase additional insurance coverage.
Availability of Other Options
The availability of other cash-producing options may be important. For example, are accelerated death benefits (sometimes referred to as living benefits) available from the life insurance company that underwrites the existing coverage? Many life insurers will advance some or all of the death benefit to a terminally ill insured. When the insured subsequently dies, any death benefits not advanced are paid to the policy beneficiary.
Accelerated Death Benefits or Living Benefits
Living benefits are generally offered through a rider on a life insurance policy. Unfortunately, only about 12 percent of existing life insurance policies carry this rider. Furthermore, qualifying for these accelerated death benefits generally requires that the insuredís life expectancy be less than 12 monthsóand sometimes less than 6 months. In addition, the amounts offered by insurers are often significantly lower than the offers from viatical settlement companies.
Accelerated benefit riders, when available, are most useful for policyholders who want to use only a portion of the death benefit and leave the remainder to their heirs. Obviously, the right course of action depends on the percentage of the face value offered under the accelerated benefits (given the insured life expectancy) and any service fees charged by the insurer to accelerate the benefits.
Some older policies may not grant an accelerated death benefit -- they were first added to policies issued in the 1980's. Some life insurance companies make this option available to all of their policyholders, so the individual carrier should be consulted as part of the viator's "due diligence" when exploring his or her options. Some states restrict licensed viatical settlement providers from buying a policy for less than the amount available under the accelerated benefits provision. (For the restriction to apply, the carrier must agree to pay it.)
Certain life insurance companies offer a loan to terminally ill insureds equal to some percentage of the policyís face amount, rather than its cash value. Should the insuredís physical condition deteriorate, he or she may be permitted to increase the loan amount.
Up until the insuredís death, there is generally no requirement that payments be made against the principal or interest. And, upon the insuredís death, any death benefit proceeds in excess of the loan balance and accrued interest are paid to the policyís beneficiaries. Because the amount advanced to the insured is a loan, it is received tax free and is repaid from the death proceeds at the time of the insuredís death.
Even if the insurer doesnít offer accelerated death benefits or special loan provisions, the insured may be able to take a cash value loan out against his or her policy that would keep the death benefit intact for beneficiaries.
Possible costs are a suitability issue to the extent that they diminish the size of the viatical or senior settlement.
Availability of Funds to Creditors
Unlike death benefits, which generally fall beyond the reach of the insuredís creditors, life settlemenats may, under certain circumstances, be allocated by a court or other legal entity to satisfy the insuredís creditors. The viatical settlement, looked to by the insured to provide needed funds on which to live, could be used instead to pay outstanding debts.
Effect on Public Assistance
Public assistance programs, such as Medicaid and those providing food stamps, are based on the needs of the recipient. Such need-based programs can be affected by the individualís cash settlement; this can have effects on the amount of benefits and even the individualís eligibility. The viator could find that his or her cash settlement windfall is quickly offset by the loss of benefits under these programs.
Tax Treatment of Proceeds
Although death benefits received by a beneficiary are generally tax free, a policyowner may find that the life settlement benefits he or she receives are subject to income taxation. We will examine closely the taxability of these settlements in the next chapter
when we look at life settlement taxability generally. However, the viator needs to understand that some, but not all, life settlements are tax free.
Security of the Settlement
It is important for the viator to have a way of being assured, once he or she has transferred the life insurance policy to the viatical settlement company, that payment will be made. The life settlement provider should agree to put the viatorís settlement proceeds in escrow with an independent party or financial institution to make sure that the funds are safe during the period of policy transfer.
Identity of the Insured
Knowing that an individual will profit from an insuredís death is unsettling at best, but knowing that the individualís profit will be greater if the insured dies sooner may be reason for panic. The viator should be informed whether buyers will have access to his or her identity, address, medical information or life expectancy as well as what actions could result from their having that knowledge. The process is not always confidential, so anyone, including creditors, may be privy to the transaction.
Who Will Estimate Life Expectancy?
The size of the life settlement principally depends on the life expectancy of the insured. Since a viatical settlement company has a vested interest in reducing the price it pays for policies, it is important that the viator know who will estimate the insuredís life expectancy. Life expectancy may be estimated by a viatical settlement companyís in-house staff, by independent physicians or by a specialty firm that analyzes medical and actuarial information. Common sense suggests that a viator would generally favor an organization or physician as independent as possible from the viatical settlement company.
How Will the Investment Be Tracked?
Individuals who invest in an in-force life insurance policy have a right to expect that their investment will be monitored. Accordingly, viatical settlement companies institute procedures to check on the health status of the insured at regular, normally monthly, intervals.
How the monitoring of the insuredís health status occurs may be an important consideration for the viator in deciding whether to viaticate and, if so, what viatical settlement company to use. The methods employed include:
contacting the insuredís primary physician;
contacting friends or relatives; and
relying on monthly postcards sent by the insured to the viatical settlement company.