Chapter 5
Ethics & Fiduciary Responsibility

The important points addressed in this lesson are:

Factors to consider when determining the suitability of a possible lifetime settlement
Disclosures required by the NAIC's Model Act
Disclosures required of members of industry trade associations
New duties facing fiduciaries in light of this new secondary market


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? Let's 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 viator's (seller's) 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 insured's life expectancy be less than 12 months-and 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.)

Policy Loans

Certain life insurance companies offer a loan to terminally ill insureds equal to some percentage of the policy's face amount, rather than its cash value. Should the insured's physical condition deteriorate, he or she may be permitted to increase the loan amount.

Up until the insured's death, there is generally no requirement that payments be made against the principal or interest. And, upon the insured's death, any death benefit proceeds in excess of the loan balance and accrued interest are paid to the policy's 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 insured's death.

Even if the insurer doesn't 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 insured's creditors, life settlements may, under certain circumstances, be allocated by a court or other legal entity to satisfy the insured's 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 individual's cash settlement; this can have effects on the amount of benefits and even the individual's 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 viator's 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 insured's death is unsettling at best, but knowing that the individual's 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 insured's life expectancy. Life expectancy may be estimated by a viatical settlement company's 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 insured's 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 insured's primary physician;
contacting friends or relatives; and
relying on monthly postcards sent by the insured to the viatical settlement company.  


Since viatical or senior settlements may not be suitable for all insureds, even those who are terminally ill, it is critical that someone considering selling his or her life insurance policy to a third party be provided with a full disclosure of all material facts before settlement.

The Viatical Settlements Model Act mandates that certain disclosures be made no later than the time that the viator makes application to sell his or her policy and that certain other disclosures be made before the viatical settlement contract is signed by all of the parties.  Viatical Settlement Providers that have joined industry trade associations must also adhere to their organization's disclosure rules -- which, in some cases, are addition to those required by law.

Please note: some states have enacted laws similar to this Model Act, others have not.  Before engaging in a lifetime settlement, be sure to review the specific laws and rules that apply to your jurisdiction.  

Let's turn our attention to these mandated disclosures.

The Viatical Settlements Model Act

The Viatical Settlements Model Act requires the viatical settlement provider to present the viator with at least the following disclosures no later than the time the application for the viatical settlement contract is signed by all parties. The viatical settlement provider may, of course, offer additional disclosures. The following list of disclosures, however, must be given to the viator in a separate document that must be signed by the viator and the viatical settlement provider or broker.

There are possible alternatives to viatical settlement contracts, including any accelerated death benefits or policy loans offered under the viator's life insurance policy.

Some or all of the proceeds of the viatical settlement may be taxable under federal income tax and state franchise and income taxes, and assistance should be sought from a professional tax advisor.

Proceeds of the viatical settlement could be subject to the claims of creditors.

Receipt of the proceeds of a viatical settlement may adversely affect the viator's eligibility for Medicaid or other government benefits or entitlements, and advice should be obtained from the appropriate government agencies.

The viator has the right to rescind a viatical settlement contract for fifteen (15) calendar days after the receipt of the viatical settlement proceeds by the viator; if the insured dies during the rescission period, the settlement contract shall be deemed to have been rescinded, subject to repayment of all viatical settlement proceeds and any premiums, loans and loan interest to the viatical settlement provider or purchaser.

Funds will be sent to the viator within three (3) business days after the viatical settlement provider has received the insurer or group administrator's acknowledgment that ownership of the policy or interest in the certificate has been transferred and the beneficiary has been designated.

Entering into a viatical settlement contract may cause other rights or benefits (including conversion rights and waiver of premium benefits) that may exist under the policy or certificate to be forfeited by the viator. Assistance should be sought from a financial advisor.

Disclosure to a viator shall include distribution of a brochure describing the process of viatical settlements. The NAIC's form for the brochure shall be used unless one is developed by the commissioner.

The disclosure document shall state the following: "All medical, financial or personal information solicited or obtained by a viatical settlement provider or viatical settlement broker about an insured, spouse or a significant other may be disclosed as necessary to effect the viatical settlement between the viator and the viatical settlement provider. If you are asked to provide this information, you will be asked to consent to the disclosure. The information may be provided to someone who buys the policy or provides funds for the purchase. You may be asked to renew your permission to share information every two years."

The insured may be contacted by either the viatical settlement provider or broker or its authorized representative for the purpose of determining the insured's health status. This contact is limited to once every three (3) months if the insured has a life expectancy of more than one year, and no more than once per month if the insured has a life expectancy of one year or less.

In addition to the disclosures that must be made to the viator before completion of the application, the following disclosures must be made to the viator no later than the date the viatical settlement contract is signed by all parties.

The affiliation, if any, between the viatical settlement provider and the issuer of the insurance policy to be viaticated.

The name, address and telephone number of the viatical settlement provider.

The amount and method of calculating the broker's compensation. The term compensation includes anything of value paid or given to a viatical settlement broker for the placement of a policy.

If an insurance policy to be viaticated has been issued as a joint policy or involves family riders or any coverage of a life other than the insured under the policy to be viaticated, the viator must be informed of the possible loss of coverage on the other lives under the policy and must be advised to consult with his or her insurance producer or the insurer issuing the policy for advice on the proposed viatical settlement.

The dollar amount of the current death benefit payable to the viatical settlement provider under the policy or certificate. If known, the viatical settlement provider shall also disclose the availability of any additional guaranteed insurance benefits, the dollar amount of any accidental death and dismemberment benefits under the policy or certificate and the viatical settlement provider's interest in those benefits.

The name, business address and telephone number of the independent third-party escrow agent, and the fact that the viator or owner may inspect or receive copies of the relevant escrow or trust agreements or documents.

Voluntary Disclosures

The National Viatical Association, a leading viatical industry association, has proposed that the following disclosures be made to the seller under a senior settlement no later than the time of application.

Other rights and benefits, such as disability benefits, conversion or particular riders on the policy, may exist under the policy and may be forfeited by the settlement. Seniors should contact their insurance carrier for additional information.
Some or all of the proceeds of the senior settlement may be subject to federal income tax and state franchise and income taxes. Seniors should seek assistance from a professional tax advisor.
Proceeds of the settlement could be subject to the claims of creditors.
Receipt of the proceeds of a senior settlement may adversely affect a senior's eligibility for Medicaid or other government benefits or entitlements. They should consult the appropriate government agencies for advice.
Acceptance of this application does not in any way constitute or guarantee the purchase of a senior's life insurance policy. The information contained within may be used for evaluation purposes only. Any information obtained may be used or disclosed to other parties for qualification purposes in order to effect or facilitate the settlement transaction.
Seniors may qualify for a viatical settlement should their life expectancy be 48 months or less. They should consult their financial advisor for further advice.

The Viatical and Life Settlement Association of America (VLSAA), which focuses on purchasers of viaticated policies,  requires its members to make the following disclosures:

annual return is based on the insured's life expectancy, which cannot be guaranteed
the identity of the party responsible for payment of future premiums.
possible future premium payments due to improved health or reaching a limiting age under a waiver of premium provision
the identity of the person who evaluated the insured's life expectancy
in the case of group coverage, possible termination of the group policy by the group owner and possible actions necessary to keep the coverage in force
the contestability of any possible claims by the insurance company under the contestability period, suicide clause, etc.
that investments in viaticated policies are illiquid, and
proper disclosure of company experience in regard to illustrations or example of past performance.

Fiduciary Responsibilities

For years insurance companies and their agents have presented myriad reasons for purchasing life insurance -- to protect heirs, pay estate taxes, as a tax-advantaged investment vehicle, to indemnify businesses for the loss of key employees, fund a business succession plan, etc.  But with the emergence of a secondary market for life policies, "insurance planning" is no longer a simple euphemism for "insurance purchase".  Now those engaged in financial planning must consider the possibility of selling existing policies as well.  As we've seen from recent events on Wall Street -- analysts are being held financially liable for making blanket recommendations "to buy " or "hold" stocks in their clients' portfolios, while ignoring the need to "sell" underperforming issues.  It is in an insurance agent's best interest -- as well as policyholders' -- to consider the possibility of selling insurance policies that no longer meet the client's needs.

Anyone engaged in financial planning activities -- insurance agents, securities brokers, trust officers, accountants, lawyers, etc. -- should become familiar with  the new secondary market in life insurance and the opportunities it makes possible.  Some clients would pleasantly surprised to learn that a once-dormant assets may now be marketable. Other clients may hold their advisors financially responsible if they are not apprised of the possibilities available to them.  In either case, advisors should at least make their clients aware of the new market's existance.  Insurance and planning professionals have a unique and powerful opportunity to realize the benefits this industry has to offer. Because life settlements have become more regulated and monitored, professionals can confidently offer life settlements as a financial planning tool to their clients. They can also be on the cutting-edge of an industry that has already seen substantial growth and rewards nationwide.

Life Insurance Trusts

The emergence of the life settlement has altered the landscape of the insurance trust business. It has presented an alternative course of action for trustees of trusts holding policies that insure the life of the trust's grantor. This alternative significantly changes the options available to a trustee in a number of situations. In some cases, sale of a policy through a life settlement will benefit the trust and its beneficiaries with proceeds that may be substantially in excess of what the more limited options previously available permitted, or by opening to them an alternative that is more in keeping with their present interests.

Many life insurance policies are owned by  a trust; and in many cases, the policy is the only asset of the trust.  The question of the suitability of the existing policy to meet the purposes of the trust document under current circumstances or the present interests of the beneficiaries has not been a frequent subject of inquiry. Trustee inaction may have been defensible in times in which purchasers of such policies were not readily available and/or the limited range of options permitted no other course.  But the ability to sell policies through life settlements has turned that type of inaction into professional irresponsibility.   The Uniform Prudent Investor Act, drafted by the National Conference of Commissioners on Uniform State Laws in 1994, has been adopted in full by the legislatures of 35 states, and substantially so in several others.  This law states that it is the duty of the trustee of a trust containing a life insurance policy as an asset, to examine regularly the question whether that policy should be sold under a life settlement, and the proceeds thereof invested in assets providing a more immediate return, consistent with the trust's purposes.  

As one expert put it:  " a trustee of such a trust must regularly consider whether to sell a policy pursuant to a life settlement in cases where:

The cash surrender value is being used by the trustee to pay the premiums of the policy;
In cases where the funds exist to pay premiums, they have become so expensive that it is no longer economically feasible to continue funding the policy;
The original purposes for the trust are now better served by other assets of the trust, or of the beneficial interest holders;
The original purposes of the trust are no longer relevant or valid, so that the sale of the policy and investment or distribution of the proceeds would be more compatible with the current interests of the beneficial interest holders of the trust. "

An Office of the Comptroller of the Currency regulation enacted in 1997 imposes additional responsibilities on national banks and the trust accounts they manage:

"Upon the acceptance of a fiduciary account for which a national bank has investment discretion, the bank shall conduct a prompt, written review of all assets of the account to evaluate whether they are appropriate.for the account.

"Once.during every calendar year.conduct a written review of the all assets, of each account for which it has investment discretion. to evaluate whether they are appropriate."