Mechanics of a Settlement

The process of selling a policy (“viaticating” in the jargon of the viatical industry) is a relatively simple one. In fact, it is similar to the process that the policyowner went through in purchasing the policy initially — but, in a sense, in reverse.

In most cases, the best place for the policyowner to begin the process of selling his or her life insurance policy is with a viatical settlement broker, attorney, life insurance agent or financial planner, who will represent the policyowner and comparison shop for the best offer. When the sale is completed, it is the buyer, not the seller of the policy, who will pay the broker a commission.   In some states, brokers need to be licensed -- so it's important to check with state law -- state regulations are discussed later in this program.

The viatical settlement broker will help the policyowner complete an application, which will provide information about the insured, his or her medical history, and the names and addresses of any attending physicians.

In addition to the application, which is sent to the viatical settlement broker, the policyowner usually must provide a copy of the policy and a policy release, which enables the broker to obtain verification of coverage from the insurance company. The insured must also provide a medical release, authorizing his or her physician to release medical information, and obtain a letter from the physician attesting to the insured’s competency.

The viatical settlement broker will present the information about the policy and medical history of the insured to a range of potential policy-buyers and solicit offers. The offers made for the coverage are then presented to the policyowner for a decision. When the policyowner has chosen the offer he or she is willing to accept, closing documents are signed with the new owner, and a new beneficiary is named. At that time, funds (which may have been placed in escrow) are released to the viator.

For those contemplating the sale of their policies, experts suggest a number of steps that a policyowner should follow in addition to those that have already been discussed:

Discuss life expectancy with a physician.
Obtain multiple bids (three to five) from competing viatical settlement companies.
Seek professional legal and financial advice in evaluating any bids received from viatical settlement companies.
Check with state authorities to see if the settlement companies are properly licensed and/or if any complaints have been filed.
Weigh the immediate need for maintaining a particular standard of living against the future needs of dependents.
Ask the insurance company to split a large policy into several smaller policies so that they may be sold as needed.
Take all guaranteed face amount increases into account when negotiating any offers to sell the policy.
If covered under a group insurance policy and leaving an employer’s service, don’t permit the coverage to expire. It may be convertible to individual coverage within the first month following termination of service.
Determine how and how often the viatical settlement company will contact the insured to track its investment.
Normally, when a life insurance policy is in the process of being purchased under a viatical settlement, the viatical settlement company will deposit the settlement funds with an independent escrow agent. When the closing process is completed, the independent escrow agent releases the funds to the viator.

From the buyer‘s point of view, the viatical settlement company will often deposit into a premium escrow account the amount of funds needed to pay policy premiums through the insured’s life expectancy plus an additional limited period, usually one year. So, if a viator has a life expectancy of one year, it would not be unusual for the viatical settlement company to deposit funds equal to two years of premiums in the premium escrow account.  Such deposits are less likely in the case of senior settlements.  

The timing of the lifetime settlement (specifically, how long it will take to receive the settlement proceeds) is often a concern to a viator. From the time that a company receives a viator’s completed application, it may take from four to ten weeks for funds to be dispersed, depending on the viatical settlement company selected. In addition, the following will affect the length of time before payment is received:

the responsiveness of the viator’s physicians;
the responsiveness of the viator’s insurance company in providing verification of coverage; and
the duration of the review by the viatical settlement company.

In addition, the timing of the settlement will depend on:

the responsiveness of the viator to the receipt of offers;
the number of viatical settlement companies from whom offers are requested; and
the insurance company’s responsiveness in acknowledging the ownership and beneficiary changes.

Unlike security transactions, which settle in a matter of days, the sale of a life insurance policy is not a quick fix to a viator’s financial problems.  In this respect, a lifetime settlement is comparable with a real estate closing.   However, for those with time and patience, viatication can lead to financial independence.

The amount that the viator can expect to receive for his or her policy depends on a number of factors.  In general, however, viators can expect between 60 and 80 percent of a policy’s face amount in a viatical settlement.  The pricing of senior settlements, based on longer life expectancies, is considerably less.   More specifically, the price paid for a life insurance policy is based on:

the insured’s life expectancy—the shorter the expectancy, the higher the payment;
the annual premium amount;
the policy type and insurance company rating;
the market rate available on other similar investments; and
whether the policy is beyond the contestability period.

These pricing factors are discussed in detail later in this program.