Let's take a closer look at the advantages and disadvantages of these investments, for viators and for investors.
Should I become a viator?
If you have been diagnosed with a terminal illness, there are several good reasons to sell your life insurance policy, but there are also significant drawbacks.
On the positive side, viating is obviously a good way for a terminal patient to ease the burden he faces as medical bills mount up. Being under financial strain has significant quality-of-life consequences, and easing that strain is the primary goal of many viators. For some patients, money derived from the sale of a life insurance policy may even result directly in an extension of their lives as they are able to seek alternative or additional medical care.
Another nice thing about viatical settlements is that, after meeting legal obligations as described above, there are no constraints on how the proceeds from the sale are spent. While you may want to devote the money to current or future medical expenses, you could also buy a crate of diamonds and cigars.
There are also drawbacks to becoming a viator. The obvious one is that a viator’s beneficiaries will no longer receive any payment upon the patient’s death. Presumably, if you have a life insurance policy, you have someone in mind who will need financial support in the event of your death. Of course, it may be the case that your children have are grown up, for example, or that your financial circumstances have otherwise changed so that the original beneficiary of the policy will not have to depend on it.
Also, viating may result in complications of your financial picture that cause you serious headaches. If you suddenly acquire a large sum of money, you are likely to lose any Medicaid benefits or other form of federal assistance which you are receiving. And, again, while people with life expectancies of less than two years are usually exempt from paying federal income taxes on proceeds from viating, those projected to live longer are not exempt, and may find themselves mired in a complicated tax situation. For this reason, it is strongly recommended that you consult a tax professional before viating.
The fact that viating requires you to deal with so many financial advisors and professionals can itself be a drawback. Simply put, that the process, from researching settlement companies to handling your taxes after the sale, can be tedious and time-consuming.
More ominously, entering into a viatical settlement can be perilous, as there are a number of unscrupulous brokers and companies who are willing to take advantage even of a terminal patient. Viators are especially vulnerable in the states which do not regulate the industry, as these states offer little in the way of consumer protection in viatical settlements. Viators might find themselves manipulated into accepting less than the market value of their policy, for example, or their payments might arrive on a creative schedule, or they might find that their sensitive personal information has been given out without their consent.
If you are thinking of viating, you should ascertain whether your state requires viatical companies to be licensed. If so, you should work with a licensed company. You can also call the Better Business Bureau and state insurance commissioner to see whether complaints have been lodged against a given company.
A final consideration, which may sound slightly paranoid, is whether you want someone with no personal ties to you having a vested interest in your death.
That is a lengthy list of drawbacks, but should not be taken to mean that viatical settlements are necessarily a bad idea. The asymmetry between the number of advantages and number of drawbacks is due to the fact that the main reason to viate is fairly obvious, whereas the reasons not to are more obscure. Clearly, though, anyone thinking of viating should plan to retain an extremely trustworthy and knowledgeable financial advisor to help them through the process.
Also, the circumstances which might lead you to think of viating can be extremely stressful emotionally as well as financially. In addition to consulting a financial advisor and tax lawyer and broker and so on, you should enlist the support of a close friend or family member.
Should I invest in a viatical settlement?
Again, the short answer is: It depends.
In the first place, a potential investor should consider how comfortable they are with the idea from an emotional perspective. Investing in a viatical settlement can be considered, in a sense, speculating on someone else’s death, which may strike you as morbid. On the other hand, you may consider it a mature response on the part of the investment community to the problem of terminal patients facing financial difficulties. You may even think of it as a socially responsible investment, in that you are helping a critically ill person through their final months or years. Or you may not have a particularly emotional reaction to the idea at all. Regardless of your feelings on the topic, however, you should be sure to assess what those feelings are before you commit to the investment.
Assuming you are comfortable with the idea, you should proceed with caution. While brokers and settlement companies will advertise wildly high rates of return—even 30-40%--those figures are based on projections that the patient will not live very long at all. While this may prove true, the patient may end up living much longer than expected. New retroviral drugs for the treatment of HIV, for example, have extended the life expectancy of AIDS patients far beyond what it was just a few years ago. And legally, as the owner of the policy, you would be obligated to pay the premiums for the duration of the patient’s life. Viatical settlements definitely fall in the high-risk category of investments.
Also, if you do decide to invest in a viatical settlement, proceed with caution. Investors have also been a victim of fraud in the viatical industry on numerous occasions. In 2000, a Consumer Reports study of 73 viatical companies found that 33 of them had gotten into legal hot water in the prior two years for a range of dubious practices. For example, investors may not receive any proof of purchase of a life insurance policy they pay for, or they may be misled about the extent to which a longer life span of the viator can drastically reduce their rates of return. Again, since the industry is not regulated in many states, it can be difficult to prevent these abuses.