The Viatical Process
Viatical settlements are easy to grasp. However, the process of arranging a viatical settlement, to say nothing of the settlement itself, can be quite confusing. What exactly is involved when someone decides to sell their life insurance policy or “viate”?
The following is a general account of viatical settlements, because they can vary substantially between individuals and, especially, between states. The viatical industry is regulated on the state level, and is not regulated at all in many states. Although the National Association of Insurance Commissioners has proposed regulation that would change this, there are currently no uniform national standards. This is crucial for would-be investors and viators alike to keep in mind, as information you find online, for example, may not apply in your state. If you are interested in being party to a viatical settlement, the state insurance commissioner’s office is a good place to start your research.
That being said, there are several active parties to any given viatical settlement. The first, the viator, is the person selling the life insurance policy. The viator has been diagnosed with a terminal disease and expects to die relatively soon, usually within 24 months.
Then there is the investor, who buys the policy. The investor is usually a viatical settlement company, who may then sell the policy to an individual investor, or who may keep the policy as an institutional investment. (For the purposes of this article, “investor” will be used to include individual and institutional investors.)
Most of the time, the viator uses a broker to help negotiate the process of selling the policy. In some cases, there is no middleman and the viator sells his policy directly to an investor, but this is unusual.
The process generally begins when a terminal patient consults a broker, with a view towards becoming a viator. The patient gives the broker pertinent information and documents, such as the policy and his medical records, for appraisal. Factors a buyer or broker will use include the value of the policy and payout, premium payments requirements, prognosis of patient, chances of patient living longer than expected, and any special payout terms. Some investors will not buy policies from small or unknown insurers. They want to see policies from well-known insurers.
If the broker decides to take on the case and comparison shops between investors, seeing who will offer the best purchase price.
Once the investor is chosen, the broker and investor negotiate specific details of the settlement. As mentioned before, the viatical industry varies a great deal from state to state. But even within a given state, the terms of each settlement vary based on a number of factors, including the patient’s diagnosis and prognosis.
During these negotiations, a potential viator will be grilled by the potential investor about every aspect of his medical condition. While this may seem invasive, the purchaser must know as much as possible about the situation in order to make an informed decision. However, the potential viator should not be expected to divulge other personal information, and should also ascertain whether the company intends to distribute his information (i.e., to marketers).
Generally speaking, however, a viator may expect to receive 60-80%, depending on their life expectancy, of their life insurance policy’s face value. It is also possible to sell only part of the policy. In exchange, they name the investor as their beneficiary. The investor, as the new owner of the policy, takes over premium payments for the duration of the patient’s life.
After all parties agree on the terms of the settlement, there may be a short window of time between when the money is offered and when all the papers are signed. In the interim, the agreed-upon fee is usually placed in an escrow account, which is held by an independent third party, for safekeeping. Insist on an escrow. It will cost you some money, but it is worth it to protect yourself.
Once the viator receives his payment, he is free to spend it more or less as he wishes--due to a provision in the Health Insurance Portability and Accountability Act of 1996, terminal patients are often not even required to pay federal taxes on the proceeds from a viatical settlement. However, we recommend a viator consult a tax professional about his or her specific situation.
There are two other caveats, one legal and one practical, pertaining to how the money is spent. If a viator has outstanding debt, his creditors can point out that settling those debts takes legal priority over everything else. Also, and although they are not required to do so, most viatical settlement companies require that the current named beneficiaries of the policy sign a waiver.
Those circumstances aside, the viator answers to no one but himself. No expenditures are too serious or too frivolous, and in fact, one of the main benefits of a viatical settlement is that a sudden cash infusion can enable a terminal patient to indulge himself in ways he never has before or take that dream vacation.
One downside to viaticating is the possibility of loss of privacy of your medical history and health situation.
As for the investor, they assume the premium payments on the life insurance policy and go about their business, for the duration of the patient’s life. One hesitation investors may have about viatical settlements it that the short duration of the patient’s life is not a foregone conclusion. In order to be the beneficiary of the policy, the investor must pay the premiums until the viator passes away, even if that takes decades.