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Viatical Settlements

It can be uncomfortable to talk about money and estate planning, particularly if death is near. But it's important to integrate financial planning into the overall process of getting one's affairs in order.

Many people who are terminally ill find themselves in need of cash to pay medical bills, cover household expenses, or fund final dreams. Viatical settlements involve selling your life insurance policy benefits to someone else (a "settlement provider" company) before you die.

Most viatical settlement companies pay a lump sum typically up to 75% of the face value of your policy, depending on your life expectancy and the expected policy premiums for the remainder of the life of the insured. The viatical settlement industry got started in the 1990's. In those early days you would have gotten a higher percentage, but since then (as of 2010) several factors have changed the rules of the game. Adjustments to Life Expectancy Tables, medical advances, and industry trends have all resulted in a lowering of the payoff values for policies. The industry has more experience now, with real history data on how previous payments based on life expectancies actually worked out in relation to actual life expectancies for the folks who sold their policies. Most of the companies have shifted their focus away from younger people with conditions like AIDS (which is now managed as a chronic illness) to concentrate on older people who have larger policies and longer life expectancies. This results in lower up-front payments to the people who sell their policies, keeping costs down for the settlement companies. Those types of deals are called Life Settlements rather than Viatical Settlements.

Note that life insurance settlements fall into two types:

  • A Viatical Settlement can be done by someone of any age who has been diagnosed with a life-threatening illness and is expected to die within twenty-four months. A properly-executed viatical settlement is free of Federal taxes in the United States.
  • A Life Settlement can be done by someone who is over 65 and has not been diagnosed with a life-threatening illness but who is not expected to live more than fifteen years. The minimum age can vary depending on health issues. A life settlement should be higher than the cash surrender value.

Are viatical settlements a good deal? Like most things, the answer depends on your personal situation and the specific deal you are offered.

While many people in the viatical settlement industry are honorable folks who provide a real service, we hope that there's a special corner of Hell reserved for the unscrupulous con artists in the business.

Since few people have any experience with arranging a viatical settlement, the chances of getting ripped off are high unless you do your homework. Unfortunately many general financial planners, accountants, tax advisors, and lawyers are unfamiliar with the obscure viatical settlement industry, so you can't count on getting accurate advice from non-specialists. If you have a general financial advisor by all means get them in the loop during your research period, but don't be surprised if you need to provide them with some background on viaticals.

Consider all your alternatives and don't assume that a viatical settlement is the only way to go. There are other ways to get cash at the end of life such as a reverse mortgage or use of Accelerated Death Benefits on your life insurance, if such benefits are available to you. These options often offer better payouts than a viatical settlement.

If you own life insurance start your research by calling your current insurance agent or company to find out if your policy includes an accelerated death benefits (ADB) provision. You may be able to collect anywhere from 25 to 95 percent of the death benefit in an early payment depending on your circumstances and the terms of the policy. Because these accelerated payments already may be included in your coverage, they are the "no brainer" deal which a viatical company will need to beat. ADB options come with strict life expectancy requirements. Some insurers require a life expectancy of six-months, others require twelve months, and a rare few require twenty-four months. Payments from these insurers for people who qualify are typically between 25% and 75% of the face value of the policy. You may be able to choose between a lump sum or monthly payments. Even if your policy does not have ADB options you still may be able to get your insurance company to give you a loan against the cash value, if any.

There's really no delicate way to say this, so we might as well be blunt. How much money you will get from a viatical settlement or accelerated death benefit provision depends on how quickly you are likely to die. From the point of view of the person or company that cashes out your policy, it would be nice if the policy "matures" right away. Viatical settlement providers will only buy your policy if you have twenty-four months or less to live, but some will permit longer terms.

Since one of the key variables in pricing the deal is estimating how long you've got left, do not rely on life expectancy estimates provided by viatical medical underwriting companies without first speaking with your own physician. Be sure you are willing and able to handle the truth. Recognize that a medical underwriting company may have a conflict of interest in discussing your life expectancy. The company may tell you that you have a long, productive life ahead of you. If that were true, your life insurance policy would not be worth much now, justifying a low-ball offer. Now that the industry has better historical data available, estimates of life expectancy in general have gone up, and prices paid to policy sellers have gone down. In any case, realize that accurate life expectancy estimates can be very difficult to make.

A viatical broker can help you evaluate different proposals. But understand that brokers may have compensation arrangements that don't encourage them to find you the best deal. They may be paid a flat percentage by the viatical company that buys the policy regardless of how much money winds up in your pocket. Ask your broker to disclose to you in writing what referral fees they will get for handling your case -- if they refuse, go elsewhere. Work with more than one broker to increase your chances of finding a decent arrangement. Insist that each broker show you at least three written offers from different funding companies so you can do the math yourself to compare the deals.

The National Association Of Insurance Commissioners has established model regulations for the viatical industry in the United States, including guidelines on how much money you should expect to get if you sell your insurance policy. The NAIC web site includes bibliographies of articles related to viatical settlements and accelerated death benefits which you can order for a small fee. At the NAIC web site you can also find official contact information for the insurance regulators in your state.

In accord with NAIC recommendations, some states require viatical settlement firms and brokers to hold licenses or be registered with the state insurance commissioner in order to conduct business in that state. Check your state insurance commissioner's office to see if they have guidelines or referral lists for your area.

California, New York, and Washington have some of the toughest regulations on viatical settlements. You may want to restrict your search to companies and brokers that are licensed to do business in those states even if you live elsewhere or if your state does not regulate viatical companies. Some states publish their lists of licensed viatical providers on their web sites.

  • California Department of Insurance
    770 L Street, Suite 1120, Sacramento, CA 95814
    Consumer Hotline: 800-927-HELP
    Licensed viatical provider list is online

  • New York State Insurance Department
    160 West Broadway, New York, NY 10013
    Consumer Hotline: 212-480-6400
    Licensed viatical provider list is online

  • Washington State Insurance Commissioner
    P.O. Box 40255, Olympia, WA 98504-0255

Don't forget to check the tax implications of a viatical or life settlement -- a good chunk of the benefit may wind up going to the government. While both death and taxes are unavoidable, taxes are the more predictable of the two. In the United States, individual states vary in how they regulate viatical and life settlements. Some states regulate one but not the other And check if the sudden influx of cash from your accelerated payment or viatical settlement will affect your eligibility for Medicaid and other public assistance programs. You can search for current IRS publications related to viatical settlements.

Because cash flow is the name of the game in the viatical industry, the amount you are offered by a particular company may change from week to week depending on how flush they are. And since their own cash flow is unpredictable, verify that the viatical provider actually has the funds to complete the deal they are offering. Don't accept partial payment or installment payments from a viatical provider, and insist that all the money be placed in an escrow account until the transaction is completed.

Viatical settlements are complicated contracts with both legal and financial elements. Doing them right will take time and input from you, your life insurance company, your physician, and any financial advisors you have on your team. Don't expect to whiz through it in a week if you want to get the best deal. The more time you can invest in the process the better, as a well-researched deal can take months to complete. If someone tries to rush you, walk away.

By the way, please note that the information given by our web site is intended for general purposes only and does not constitute legal or financial advice. We could be dead wrong about something important to your situation. Your best bet is to talk with a competent attorney or financial advisor licensed to practice in the area where you live. We make no endorsement of any specific financial advisor or financial approach. Estate planning and viatical settlements are topics that can invite abuse, so watch your wallet when visiting sites or talking with advisors.

Bookstore suggestions related to viatical settlements:

Funeral And Memorial Planning