Viator and Investor Concerns

When the lifetime settlement is complete, the policyholder gives up ownership and control of the policy to another party.  Viators surrender their surviving family members' ability to collect the death benefit of that policy.  From an investor's perspective, a lifetime settlement is an investment in the timely death of the insured person -- which represents a significant investment risk.  The table below summarizes a number of risks buyers and sellers faces -- and concerns that investors and viators of life insurance policies should be aware of when contemplating a lifetime settlement.  As you can see from this list -- investors contemplating buying a viaticated policy face many more issues than viators.

"the seller"
"the buyer"
negative financial impact on policyholder and others:
settlement may deny survivors of needed death benefits
unless escrowed properly, viators risk assigning the policy without receiving payment
proceeds may be inadequate to meet viator's needs
receipt of proceeds may cause the viator to lose other "means tested" benefits available from charitable organizations or government programs such as Medicaid, Medicare, Social Security, etc.
Privacy and tracking problems:
many people are involved in the transaction and they may have access to personal information such as medical records
viators should inquire as to who will be privy to personal information
find out the identity of the escrow agent and their relationship, if any, to the settlement provider  
determine who is responsible for tracking the insured's health and whereabouts
examine the adequacy of the tracking process -- the insured may not comply with requests for information or medical exams
the insured may use the proceeds to travel, making efforts to track (or obtain a death certificate) more difficult

Know who is responsible for various actions:
the viator may have to pay off any policy loans before selling the policy
in the case of permanent insurance, what will happen to policy dividends, accidental death benefits, and other riders or benefits attached to the policy?
know the method(s) the settlement provider will use to track the insured
who is responsible for obtaining a copy of the death certificate and the costs associated with that effort
future premiums must be paid to keep the policy in force -- are those costs "escrowed"? if so, for how long? if not, who is responsible for making those payments?
will benefits be paid by the insured directly to the investor as a named beneficiary on the policy, or indirectly through a trust established by the settlement provider
in the investment contract the settlement provider should guarantee prompt payment of the death benefits when the insured dies
be aware of any administrative fees imposed (for tracking insured, escrow accounts, etc.)
Life expectancies are only estimates
viators may outlive the anticipated life expectancy, and proceeds may not last long enough
how is the life expectancy estimate determined?
is the person estimating life expectancy qualified?  independent of the settlement provider?
was life expectancy based on a physical examination of the insured or a review of medical records?  was there a second opinion?
if the insured outlives the life expectancy, the investor's rate of return will be less (sometimes far less) than anticipated
the insured may outlive the investor, which may cause problems in probate or other estate-planning issues
Group life policies are owned by a third party (such as an employer)
viators should determine who will be responsible for converting the group certificate to individual coverage
investment in a group life certificate is not as "safe" as an "individual" policy.  The policyholder (the employer) may change the contract or even drop it in favor of another group policy.
some group policies cap the amount of group certificates that can be converted to individual policies
conversion from group to individual coverage usually results in a higher future premium payments
Not all settlement providers are the same:
offers can vary widely from one provider to another -- viators should shop around
make sure the broker and provider are properly licensed
investors should determine the process of recovering his or her investment if the provider goes out of business
investors should be ready to trace the purchased policy in case the provider goes out of business -- investors should insist on disclosure of the name of the insurance company and policy numbers of any policies they have invested in
investors should evaluate the financial solvency of the settlement provider
make sure the agent and provider are properly licensed
viatical settlement providers may be subject to different state laws and rules (or no laws at all) depending on where they conduct business
The right to the death benefit may be questionable:
the viator's heirs may challenge the assignment
the policy may be under a court-ordered restriction, such as a divorce settlement in which one party is responsible for maintaining the policy while the other party remains as beneficiary.
investor should investigate any possible legal challenges -- competency of the viator, pending lawsuits against the viator
Lack of control:
the investment "matures" upon the death of the insured -- and an unknown date in the future.  There are no provisions for early payment
dependent on the continued existence and financial solvency of the viatical settlement provider to track the investment until maturity
death benefits will be paid only upon filing a valid claim, which includes a death certificate.  Administrative problems in obtaining a death certificate may delay eventual payment.
possible fraud
be aware of the contestability period of any policy invested in -- "wet paper"
be aware that the applicant may have obtained the policy fraudulently -- "cleansheeting"
be aware of circumstances in which the insurer may deny claims after the contestability period -- impersonation, lack of insurable interest, fraud involving the viator and settlement provider
tax consequences
there may be serious tax planning implications, investors should discuss these with their tax advisors
investment in lifetime settlements through a retirement account such as an IRA or 401(k) can create difficulties if the insured does not die before retirement funds are needed or before mandatory distributions must begin (usually age 70½)