3.7 - Viatical Settlements and Life Settlements Flashcards
Viatical Settlement
An agreement between a third party who specializes in such transactions (viatical settlement provider) and a life insurance policyowner (viator) insuring the life of an individual with a life-threatening or terminal illness. Normally, the terminally-ill insured must have a life expectancy of 2 years or less. The firm purchases the policy at 60 to 80% of the face amount, expecting to profit as the new policyowner at the time of claim. The insured is provided with tax exempt discounted value during the terminal illness, but must relinquish all ownership rights to the buyer.
For example, an insured has a $100,000 policy and the Viatical Agreement is $60,000. Upon the insured’s death, the new owner could profit up to $40,000, less any business expenses, and any premiums paid up to the time of claim.
There are substantial up-front costs paid for by the purchaser of the policy in terms of legal documents, medical records, and life expectancy reports. The risk to the purchaser is that the insured does not die within the time period anticipated and could lose money on the transaction.
The discounted proceeds are received by the insured at the time of the agreement. The policy must be in force when the agreement takes place.
The viatical life settlement laws which have been adopted by the states are intended to protect a terminally ill person from exploitation. They must not obtain a lesser benefit than they could obtain on their own by taking a loan or cash surrender from their life insurance company or through a living needs provision or rider in their policy.
Life Settlement
Similar to a viatical settlement in that it is the sale of an existing life insurance policy to a third party for more than its cash surrender value but less than its death benefit. There is no requirement for the insured to be terminally ill in order for a life settlement to occur, whereas, there is with a viatical settlement. A policyowner may choose to sell their policy because the premiums are too high or they want to purchase a different policy.
