Viaticals & Life Settlements...The Secondary Market

In 1989, An American who had come to grips with the fact that he had terminal cancer sold an existing in-force life insurance policy for an amount greater than the cash value and less than the death benefit. This transaction marked the beginning of a life insurance secondary market i.e. the Viatical Settlement Market. The market in which an investor purchases a life insurance policy from a policyowner rather than from the issuing company. Viatical is derived from the Latin viaticus, meaning “journey,” . The term has come to describe the process of purchasing an existing in-force life insurance policy covering a terminally ill insured.

Viatical and Life Settlements - The Life Insurance Secondary Market
A  viatical settlement allows you to invest in another person's life insurance policy. With a viatical settlement, you purchase the policy (or part of it) at a price that is less than the death benefit of the policy.

• When the seller dies, you collect the death benefit.
• Your return depends upon the seller's life expectancy and the actual date he or she dies.
• If the seller dies before the estimated life expectancy, you may receive a higher return.
• If the seller lives longer than expected, your return will be lower.

You can even lose part of your principal investment if the person lives long enough so that you have to pay additional premiums to maintain the policy. Viatical settlements can be risky investments. For these reasons, you should exercise caution and thoroughly investigate before you consider investing in a viatical settlement.

Purchase Process…similar to buying life Insurance
Obtaining a viatical or life settlement resembles the process of purchasing a life insurance policy. Just as in the life insurance sale, the process begins with an identification of need. Following the uncovering of a need, the policyowner completes an application which is submitted to and reviewed by a settlement provider:

1. Application is made by the policyowner to sell the policy. The application will usually have sections that ask detailed information about:
   1. the life insurance policy that is the subject of the sale
   2. the owner of the policy
   3. the insured
   4. insured’s attending physicians and any other physicians, who have treated the insured in the previous five years
2. Documentation relative to the policy and the insured’s medical status is provided to the settlement company.
3. The submitted documentation and application are reviewed by the settlement provider.
4. Determination is made by the settlement provider that the life insurance policy is, or is not,suitable for sale.
5. An offer is made for the purchase of the policy (or a notice of a lack of suitability is sent).

Although life settlement providers generally try to use up-to-date information to evaluate the insured and the policy, it is important to understand that any offer is based principally upon the provider’s estimate of the insured’s life expectancy. Because such an estimate implies a certain amount of subjectivity, a settlement offer from one provider may differ from the offer that would be made by another provider. Generally, the settlement amount offered to the policyowner for the purchase of a life insurance policy in the secondary market is negotiated; consequently, no minimum required settlement amount
is imposed. Despite that, certain expected percentages of a policy's face amount, based on the insured’s life expectancy, have emerged as appropriate settlements.

• If Insured Life Expectancy is  fewer than 6 months...Expected Percentage of Death Benefit Offered as a Settlement Amount is 80%
• If Insured Life Expectancy is  6 months to less than 12 months...Expected Percentage of Death Benefit Offered as a Settlement Amount is 70%
• If Insured Life Expectancy is  12 months to less than 18 months...Expected Percentage of Death Benefit Offered as a Settlement Amount is 65%
• If Insured Life Expectancy is  18 months to less than 24 months...Expected Percentage of Death Benefit Offered as a Settlement Amount is 60%
• If Insured Life Expectancy is  24 months or longer...Expected Percentage of Death Benefit Offered as a Settlement Amount is 50%

If the offer is accepted, a closing package—including an absolute assignment form is sent to the policyowner for review and signature. When the necessary forms are signed by the policyowner and returned to the settlementprovider, the insurer is notified. The funds are transferred from an escrow account to the policyowner.

Viatical Fraud
The first 15 or so years of this growing industry led to a number of abuses. The North American Securities Administrators Association deemed the problem of misrepresented viaticals to be among the top 10 frauds in America.

Types of Viatical Fraud

• Clean Sheeting occurs when a person with a life-threatening illness applies for new life insurance and does not disclose the truth about his/her health.  
• Dirty Sheeting occurs when a healthy person viaticates a life insurance policy. The healthy person provides false medical information to indicate that he or she has a life-threatening illness.
• Wet-ink policies are new life insurance policies that are sold immediately after being issued -- before the ink is dry.  These policies were applied for by the insureds who intended to sell them immediately after they were issued. Wet ink is common when healthy seniors are solicited by insurance agents who sign them up for new insurance with the intent to sell these policies. The applicants or insureds do not pay any premiums or they are reimbursed for the first premium.
• Life Expectancy Fraud happens when the viatical company informs investors that the life expectancy of an insured is short (i.e., 12 months) when it has data to show that life expectancy may be 60 months or longer. 
• STOLI’s  “Stranger Originated Life Insurance” is also called no premium life insurance. This occurs when someone with no insurable interest takes out a life insurance policy out on a senior they don’t know, with the hope of selling it later for a profit. The reason this is considered viatical settlement fraud is that when the senior sells the policy in a life settlement they are responsible for the taxes, while the person responsible for the whole thing transaction is usually long gone with the life settlement proceeds. 
• Warehousing is the fraudulent practice whereby a link in the viatical settlement chain…a life settlement broker or life settlement provider, for example, keeps a policy in force that was purchased through clean sheeting until the end of the contestable period in order to avoid detection of the fraudand a resulting rescission.
• Viatical Ponzi Schemes are fraudulent investment schemes in which investments made by later investors are used to pay artificially inflated investment returns to earlier investors. Such schemes have occurred in connection with viatical settlements.

Taxes and Viatical Settlements
Viatical Settlement funding was made tax-free as of January 1, 1997. According to the Health Insurance Portability and Accountability Act of 1996, income acquired from viatical settlements and accelerated benefits for patients who are terminally and chronically ill are not taxed on a federal level. The only stipulation is that the life expectancy of the viator must be less than two years and the viatical settlement company must be licensed.

The Health Insurance Portability and Accountability Act of 1996 makes the proceeds of Viatical Settlements TAX-FREE on the Federal level for individuals who are terminally or chronically ill.

• Terminally ill - defined as being diagnosed by a certified physician to have a life expectancy of less than 24 months.
• Chronically ill - defined as being permanently and severely disabled by an illness.

Some states do not follow the same standards. Most states currently do offer an exemption from state taxes on money gained from a viatical settlement, however, all fifty states are not in accordance,. Therefore it is important to check if your state taxes viatical settlements before entering into one.

Tips For Selling Your Life Insurance Policy

1. Policyowners should seek and obtain multiple settlement offers. Experts suggest that five offers are desirable.
2. Make sure the settlement provider agrees to put your settlement proceeds in escrow with an independent party or financial institution to make sure your funds are safe during the transfer.
3. Consult your own financial advisor, who knows your personal financial needs.
4. Contact your state insurance department for information about current laws.
5. Be aware that the proceeds may be subject to the claims of any creditors.
6. Find out whether receipt of a cash settlement will cause you to lose any public assistance benefits such as food stamps or Medicaid.
7. Find out if you have the right to change your mind about the settlement after you get the proceeds. You may have only a certain period of time to change your mind. 

Ask The Right Questions...here's a few

• Do I still need life insurance protection?
• If I sell my policy, how do they decide how much cash I get?
• Is this an employer or other group policy? If so, do I need their permission to sell it?
• If I sell my policy, who will be the legal owner?
• Do I need the advice of a tax or estate planning advisor before I decide to sell my policy?
• Will investors have specific information about me, my family or my health status?
• Is the broker or company I plan to sell to... allowed to do business in my state?
• After I sell my policy, can it be resold by the buyer?

Protect Yourself

Is the life settlement broker or provider licensed in your state? A growing number of states regulate life settlement companies and life settlement brokers to some degree, and may require that they be licensed. Be sure to ask your state insurance commissioner whether the life settlement company or broker you are dealing with is properly licensed—and whether either has a record of complaints. If you are working with a securities broker, FINRA BrokerCheck should be your first resource to learn about his or her professional background, registration/license status and disciplinary history. Also get more infomation from the Life Insurance Settlement Association-LISA 

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Ryan Cass posted on Friday, May 28, 2010

Tags: Seniors, Viatical, Life Settlements, Life Insurance

Posted in: Site News, Investments

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