The following list defines terms commonly used in general conversation regarding lifetime settlements. Some of these terms have more technical or legal usage under state law. Please consult with relevant laws applicable in your jurisdiction. (Some of these definitions refer to the NAIC’s Viatical Settlements Model Act -- these may have been simplified for purposes of this glossary. For more complete definitions, refer to the Act)
Accelerated Death Benefit - A rider available on some life insurance policies that typically pays some or all of the policy's death benefit before the insured dies. The insured must be diagnosed as terminally or chronically ill -- and the amount of the benefit depends on estimated life expectancy. It is a possible method to get cash from a policy without selling it to a third party. This feature is not available on all policies and if it is available, there may be a processing fee for policyholder’s electing this option.
Accredited Investor – As used in the Securities and Exchange Commission's Regulation D, these are certain sophisticated investors for whom various mandated disclosures are not required. In general these include: financial institutions, officers of firms issuing securities or individuals with high net worth ( $1 million+) or income ($200,000+ per annum).
Assignability -The ability to transfer or sell a contract to another individual or business who were not party to the original contract. Under most states’ laws, life insurance contracts are assignable.
Assignee - The person or business entity who is given, obtains, or buys the rights under a contract.
Assignment - The transfer of the rights, title or interest under a contract. Relating to life insurance, assignments may be absolute or collateral. An absolute assignment is a complete transfer of ownership. A collateral assignment, typically used to secure a debt, is a temporary assignment of some or all of benefits for the term of the loan. Upon loan repayment, the entire policy reverts to the original owner.
Assignment for Value - When the current policy holder receives something of value as an inducement to transfer his or her ownership interest to someone else. A lifetime settlement is considered an assignment for value since the current policyowner receives a financial settlement in exchange for transferring the ownership of their policy.
Assignment as a Gift - when the current policy holder transfers ownership of their policy to someone else strictly as a gift. A gift assignment means that there has not been an exchange of something of value as an inducement to transfer ownership interest in a policy.
Assignor - The person giving or selling an asset or contract, and subsequently, forfeiting rights to that asset or rights under the contract.
Beneficiary - The person or party entitled to receive the benefits, or proceeds, of the life insurance policy upon the death of the insured person. Beneficiaries may be revocable or irrevocable. A revocable beneficiary has not vested interest in the policy until the death of the insured. An irrevocable beneficiary has a vested interest in the policy -- and any subsequent change in ownership or exercise of rights by the policyholder must be approved by the irrevocable beneficiary.
Brokers - companies that refer potential viators to funding companies and receive a fee from the funding company. In some states, brokers must by licensed by a regulatory authority -- see Viatical Broker.
Cash value -- a savings component incorporated into permanent life insurance. Cash value accumulated under the contract belong to the policyholder as a matter of state law.
Chronic Illness or Chronically Ill - defined by the Health Insurance Portability and Accountability Act of 1996 as: a person certified by a physician as being unable to independently perform at least two activities of daily living [e.g. toileting, transferring, bathing, dressing and continence] for at least 90 days due to a loss of functional capacity or cognitive impairment.
Contestability Period - The time during which the insurance company can investigate an applicant’s request for insurance based on information they provided on the application. While this period varies from policy to policy, it generally is 2 years. See also Incontestability, Suicide Period.
Death Benefit -- the amount payable to beneficiaries of a life insurance policy upon the death of the insured.
Disability Waiver of Premium - A rider available in some life insurance policies at an additional cost that keeps the policy in force but forgives the payment of premiums if the insured is totally disabled. There is a typically a waiting period of six months before the waiver becomes effective. If the insured becomes totally disabled, premium payments are no longer required to keep the policy in force. Such a feature makes a policy more valuable in a lifetime settlement. In a group policy with this waiver, if insureds are granted disability waiver of premium status, their insurance coverage cannot be stopped or their benefits reduced while they are disabled, regardless of any change in relationship that may occur between the original group policyholder and the insurance company.
Escrow - funds held by a third party until the conditions of a contract are met. In viatical settlements, the lump sum paid to the terminally ill person is held in escrow until the transfer of ownership and change in beneficiary are recorded.
Escrow Agent - under NAIC’s Viatical Settlement Model Act, an escrow agent must be a state or federally regulated financial institution whose responsibilities include accepting investor funds, transferring funds in order to purchase policies, paying insurance premiums and receiving death benefits for any policy in which the viatical investor are not the beneficiaries.
Face Amount or Face Value - another term for Death Benefits.
FEGLI - Federal Employee Group Life Insurance
Financing Entity - under the NAIC’s Viatical Settlement Model Act, a purchaser of life insurance policies or certificates whose principal activity related to the transaction is providing funds to effect the life settlement or purchase of one or more policies: and who has an agreement in writing with one or more Providers to finance the acquisitions of Sales Contracts. Financing Entity does not include a non-accredited investor or viatical settlement provider. See Viatical Settlement Provider.
Financing Transaction - under the NAIC’s Viatical Settlement Model Act, a transaction in which a licensed Provider obtains financing from a Financing Entity including, without limitation, any secured or unsecured financing, any securitization transaction, or any securities offering which either is registered or exempt from registration under federal and state securities law.
Funding company - company that raises capital to buy life insurance policies. see Financing Entity
Group Life - Policies, usually term, purchased through a group, normally an employer. While these can be sold under a lifetime settlement, they must be assignable or convertible to individual coverage.
HIPAA - Health Insurance Portability and Accountability Act of 1996 (Public Law 104-191). This law provides for the proceeds from viatical settlements completed on or after January 1, 1997 to be free from federal taxes for people defined as terminally ill. Under certain circumstances the law provides for tax-free payments (up to an inflation-adjusted amount) for people deemed chronically ill.
Incontestable clause - a provision in a life insurance policy that limits the insurer’s ability to deny claims on policies obtained through misrepresentations. Once the contestability period has elapsed, the insurance company is no longer permitted to cancel the policy except for nonpayment of premium (or in rare cases such as impersonation, intent to murder or lack of insurable interest.) see Contestability Period.
Insured - The person whose life is covered under a life insurance policy. The insured may or may not be the same as the policyholder.
Life Expectancy - the anticipated remaining life of the insured. Generally, insurance companies use mortality table to estimate life expectancies. In lifetime settlements life expectancy is determined through the insured’s medical records and appropriate experiential data.
Lifetime Settlement - The sale (assignment or transfer) of the death benefit or any portion of an insurance policy or certificate of insurance for compensation less that the expected death benefit of the insurance policy or certificate. Some state laws may also define as lifetime settlement a loan secured by the death benefits of a life insurance policy (other than a policy loan by a life insurance company secured by the cash value of a policy) Lifetime Settlements can be classified “viatical settlements” in which the insured is terminally ill or “senior settlements” in which the insured is not terminally ill.
Monopoly -- a market in which there is only one seller.
Monopsony -- a market in which there is only one buyer.
NAIC -- the National Association of Insurance Commissioners
Net Death Benefit - The face amount of the life insurance policy or certificate to be viaticated less any outstanding debts or liens.
Policyholder - for lifetime settlements, policyholder refers to the owner of an individually-owned life insurance policy or a certificate holder insured under a group policy. .
Permanent Insurance -- Insurance contracts that offer lifetime coverage for fixed premium payments. Premiums may be payable for life (whole life), or for shorter periods (limited pay). Permanent insurance generates cash value -- the basis for the policy‘s “surrender value“.
Related Provider Trust - under the NAIC’s Viatical Settlement Act: A trust established by a licensed viatical settlement provider or a financing entity for the sole purpose of holding ownership or beneficial interest in purchased policies in connection with a financing transaction.
Senior Settlement - A lifetime settlement in which the insured is not terminally ill. Typically the insured is over age 70, and suffers from a serious -- but not life threatening -- health condition.
Secondary Markets – A market place for an outstanding (vs. newly-issued) asset. Sales of previously-owned automobiles or existing home sales are examples of secondary market trading -- as are stock exchanges, over-the-counter trading of stocks and bonds, world-wide currency markets (as opposed to the “primary markets” for newly-issued securities). By extension, lifetime settlements represent a secondary market in previously-owned (“outstanding”) life insurance policies.
SGLI - Servicemember’s Group Life Insurance
Special Purpose Entity - under the NAIC’s Viatical Settlement Act: A corporation or other entity formed solely to provide access (either directly or indirectly) to institutional capital markets to a financing entity or viatical settlement provider.
Suicide Period - A period of time at the inception of a life insurance contract -- specified in the policy, usually the first one or two years -- in which the insurance company will not pay a death claim due to suicide. Generally, speaking if the insured commits suicide during this period, the insurer will return all premiums paid -- many states also require the company to pay interest on those funds. See Contestability Period
Term Life - sometimes called “pure insurance”, term policies pay a death benefit but do not build up cash value. These are normally guaranteed renewable for a specified period of time, or up to a certain age, although premiums can escalate sharply. Some term policies keep premiums flat for specified periods such as five or 10 years.
Underwriting - In general, underwriting refers to a insurance company’s efforts to assess the financial risk of an applicant. Regarding lifetime settlements, underwriting is an information-gathering and verifying process -- including an evaluation of the insured‘s life expectancy. policy provisions, etc. See Verification of Coverage.
Universal life - a life insurance policy that offers flexible premiums, adjustable death benefit and allows premiums to be skipped provided there is enough cash value to cover them. Like permanent insurance, universal life affords lifetime coverage and accumulates cash value -- but under under a more flexible contract.
Vested interest -- eventual ownership of an asset that is delayed only by the passage of time. As opposed to a contingent interest in which eventual ownership depends on certain events occurring or not occurring in the future.
Verification of Coverage - Part of the underwriting process in which the viatical settlement provider contacts the policy’s issuing company to determine whether the policy is past the contestability and the suicide periods, if the policy has already been assigned to someone else, if there is an irrevocable beneficiary, what the premiums are, if the premiums are current, etc.
VGLI - Veteran’s Group Life Insurance
Viatical - (from the Latin "Viaticum" (vi-at-i-kum), an allowance for traveling expenses or provisions for a journey.) Initially the term “viatical” applied to the sale of life insurance by a terminally ill person. In some contexts, that narrow use -- i.e., terminal illness -- continues to have meaning (as in the difference between viatical settlement vs. senior settlement) . In other instances, "viatical" can be applied to the broader lifetime settlement process -- for example, the provisions of the NAIC's Viatical Settlement Model Act apply to both viatical and senior settlements. See Viatical Settlement, Senior Settlement
Viatical Settlement - Historically, the sale of a life insurance policy to a third party by a terminally ill individual. The term today also refers to the sale by a policy owner who may not be the terminally insured individual. This could be a corporation or another family member.
Viatical Settlement Contact -- under the NAIC’s Viatical Settlement Model Act: a written agreement entered into between a viatical settlement provider, or its related provider trust, and a viator. The viatical settlement contract includes an agreement to transfer ownership or change the beneficiary designation of a life insurance policy at a later date, regardless of the date that compensation is paid to the viator.
Viatical Settlement Agent -- under the NAIC’s Viatical Settlement Model Act: a person other than a licensed viatical settlement provider who arranges the purchase through a viatical settlement purchase agreement of a life insurance policy or an interest in a life insurance policy. See Viatical Settlement Purchase Agreement
Viatical Settlement Broker - under the NAIC’s Viatical Settlement Model Act: a licensed person who, for a fee, on behalf of a policyholder, offers or attempts to negotiate viatical settlement contract. A broker represents only the policyholder and owes a fiduciary duty to the policyholder regardless of the manner in which the broker is compensated. A broker does not include an attorney, certified public accountant or financial planner retained in the type of practice customarily performed in their professional capacity to represent the policyholder whose compensation is not paid directly or indirectly by the viatical settlement provider.
Viatical Settlement Investment - means the contractual right to receive any portion of the death benefit or ownership of a life insurance policy or certificate, for consideration that is less than the expected death benefit of the life insurance policy or certificate. Viatical Investment does not include:
a. any transaction between a viator and a viatical settlement provider;
b. any transfer of ownership and/or beneficial interest in a life insurance policy from a viatical settlement provider to another viatical settlement provider or to any legal entity formed solely for the purpose of holding ownership and/or beneficial interest in a life insurance policy or policies;
c. the bona fide assignment of a life insurance policy to a bank, savings bank, savings and loan association, credit union, or other licensed lending institution as collateral for a loan; or
d. the exercise of accelerated benefits pursuant to the terms of a life insurance policy issued in accordance with the insurance laws of your state.
Viatical Settlement Provider - under the NAIC’s Viatical Settlement Model Act: a person, other than a policyholder who enters into a viatical settlement contract with a policyholder. A provider does NOT include:
banks, S&Ls, credit unions or other licensed institutions which takes an assignment of a life insurance policy as collateral for a loan;
any natural person who enters into no more than one agreement in a calendar year for the transfer of a life insurance policy, for compensation or anything of value less than the expected death benefit payable under the policy;
Viatical Settlement Purchase Agreement - A contract or agreement between a viatical settlement provider with a viatical settlement purchaser -- to which the policyholder is not a party -- to purchase a life insurance policy, an interest in a life insurance policy, acquire a beneficial interest, or a certificate issued pursuant to a group life insurance policy.
Viaticate - (vi-at-i-kate) (Historically, to furnish with the provisions necessary for a journey.) v. To sell a life insurance policy to a third party. Initially it applied only when the insured was terminally ill, now the term applies to any policy sold in a lifetime settlement..
Viatication - the process of transacting a lifetime settlement.
Viator - (vi'-a-tor) n. A policyholder who sells his or her life insurance policy to a third party.
Whole life - permanent life insurance normally in force for the insured's lifespan with a fixed premium payable for as long as the insured is alive. See permanent insurance.