Viaticals and Life Insurance Settlements
Which is the Better Option?
There are two investment strategies available to investors that some investors may consider to be ethically questionable, given that they involve profiting from the death of an insured person through the purchase of a life insurance policy. The former, called a viatical, is an investment strategy in which an investor purchases the insurance policy of someone who is terminally ill, hoping that the person will die soon, so the investor can make a quick profit. Viaticals started as investments in the 80’s when funding companies started buying life insurance policies of individuals who were diagnosed as HIV positive. The main selling motive of those who had been diagnosed with HIV or AIDS was to cover medical expenses and fund quality of life improvements. On the other hand, the buying motive was for investment income—the sooner the death of the insured person, the higher the return on the investment. For those to whom the idea of a viatical is not an appealing option as an investment, a second, more acceptable form of profiting from the life insurance policy of another person are life insurance settlements, in which the owner of the policy sells the policy to an investor who then collects on the policy when the original owner dies at some time in the future.
The concept of life settlements and viaticals is almost identical, as both involve a policy owner and a funding company transferring ownership of a life insurance policy in exchange for a sum of money. The difference between the two is based upon the expected life span of the insured. If the insured's life span is short, generally less than two years, the service is deemed a viatical. If the insured is older but in reasonable health and has a life expectancy of 2-15 years, the service is normally deemed to be a life insurance settlement.
Investors are showing a greater interest in life settlements than viaticals based upon two main reasons—past bad publicity on viaticals as being an ethically questionable investment because it involves the terminally ill and advances in medical technology that have extended survival time for terminally ill patients. As medical technology advances, it is becoming increasingly risky for an investor to assume that in the short term, no cure or life extension would be found for any specific medical condition.
When viaticals were developed in the 80's and funding companies were investing in life insurance policies of HIV positive consumers, at the same time the extent and severity of the AIDS epidemic put a great deal of attention on the search for a cure or at least better treatment options. For example, new advances in AIDS drugs have dramatically extended the lives of many of those infected with the HIV virus or who have AIDS. As advances increased survival time, the appeal of viaticals as an investment strategy decreased.
Regarding the increase of interest in life settlements, increasing economic hardship has pushed more and more seniors to not only sell the mortgages on their homes but to also make use of the opportunity to sell their existing life insurance for cash. The reasons are diverse but include among others:
To use the money obtained to fund other investments, pay bills, enjoy vacations, etc.
The insurance premiums are no longer affordable, the insurance is no longer needed, or no longer serves its original purpose.
Their estate size has diminished and the amount of insurance coverage is regarded as excessive.
To use the money obtained for charitable giving (philanthropy).
To fund the improvement of their quality of life.
Life settlements can be a valuable source of liquidity for people who would otherwise surrender their policies or allow them to lapse—or for people whose life insurance needs have changed.
But life settlement investments are not for everyone—they can have high transaction costs and require careful scrutiny by potential sellers. Even when an investor decides that a life settlement is generally right for him or her, it can be hard to tell whether one is getting a fair price.
If a person decides to sell a life insurance policy, the seller must consider these factors:
Get quotes from several providers and be sure to have a strong offer for the policy, including costs for commissions;
Compare the cash payment received to the face value death benefit of the policy;
Be sure about the impact of the payment on other aspects of his or her financial life—taxes could be a factor, eligibility for public aid could be lost, and creditors could go after the payment;
Confirm how the sale is completed and whether the third-party services of an escrow company are used.
If you decide to look into life insurance settlements as an investment option, do your research and make an informed investment decision. Make sure you know the answers to these questions:
How the health condition of the insured is verified—is there confirmation by a physician?
What are your rights to information about the insured's condition, now and in the future?
Who owns the policy and pays the premium?
What rights do you have regarding the policy?
Are transactions handled by an escrow company or the buying company directly?
Are the policies purchased beyond “contestability periods” as applicable under U.S. insurance law?
It is also possible that, rather than investing on your own, investing through an investment fund would generate some extra benefits such as:
Diversification of policies—the fund would own a portfolio of life settlement policies. The fund’s investment portfolio would own policies covering numerous lives. The direct purchase of a similarly diversified portfolio of life settlement policies by an individual investor would be both complicated and costly.
Diversification of the insured persons covered by policies—the fund would own a portfolio of life settlement policies insuring the lives of numerous insured persons of various ages that may suffer from different health impairments.
Diversification of life insurance companies issuing the policies—the fund would own a portfolio of life settlement policies issued by a range of highly rated insurance companies, or one can make use of a fund with insurance companies rated less favorably so long as the face value of the policy issued by such insurance companies is fully guaranteed by the appropriate state guarantee fund in the event that the insurance company is unable to fulfill its obligations for payment under a given policy.
Although funds that invest in life settlements are being structured and offered in various parts of the world, the U.S. is by far the best regulated market, with investor protection resources such as AARP, State Insurance and Security Commissions, and the Security and Exchange Commission.