The sale of a life insurance policy by the owner before the policy matures is called viatical settlement. This kind of arrangement involves insured individuals with a life expectancy of less than two years—so most people who are terminally ill enter this kind of deal. Some people may confuse viatical settlement from life settlement as these two are almost similar, but the latter involves individuals with a longer life expectancy of two to 15 years.
The viatical settlement is usually purchased at a price that is less than the benefit of the insurance policy. The person or company who purchased the insurance policy of someone (who is terminally ill) will collect the health benefit of that person when he/she dies.
In countries with high healthcare costs or under-subsidized health care support from the government, viatical settlement proves to be advantageous for people who are terminally ill as this allows them to pay for their hospital bills and help them with their financial management.
From the investor’s viewpoint, purchasing viatical settlement is almost the same with buying a bond with a negative coupon without any redemption date. The return benefit will just depend on the seller’s life expectancy.
In the US, this settlement became popular in the late 1980’s when AIDS epidemic was widespread among gay men who had life insurance policies but without any family to support. The viatical settlement let them extract value from their insurance policy while they were still alive. The seller and the policyholder mutually benefited from this arrangement, as the former collected their return at a relatively short time, while the latter can pay for their extremely high health insurance premiums.
There are government regulatory agencies that oversee and regulate dealings with viatical settlements as the industry has attracted unscrupulous life insurance dealers who demand large commissions to push the settlements. Companies that purchased life insurance policy from its owner would often resold it to individual investors, and this would require salesperson/middlemen. This is not a conventional investment for companies as hiring middlemen may sometimes be too costly.
Because of some medical breakthroughs, the life expectancy of people becomes longer. This means that investors will have a longer time to collect their returns because the policyholder will have a longer time to live.
Although some investors had a fair share of bad experiences with viatical settlements, these remain a great means of terminally people to manage their financial responsibilities. According to a 2002 study, viatical settlements provide a lot of mutual benefits to investors and the policyholders. This settlement also has a high approval rate to many hospice financial counselors.
For companies who are in the business of viatical settlements, be careful when investing on a policy. Some fraudulent middlemen sell insurance policy of applicants who are not really terminally ill. Medical exams and blood tests would reveal if someone is really a candidate for a viatical settlement. So make sure to follow lenient procedures and background checks for the policyholder applicants before investing on his/her insurance policy.
If you choose to participate in selling your life insurance policy to a third party, be sure to shop the policy around because you may be able to get more money for it from one company over the next.
Comment by Byron Udell — May 19, 2008 @ 8:30 am