Viatical Settlements

The word viatical comes from the Latin word viaticum, which means “provisions for a long journey.” A viatical settlement is the sale of a life insurance policy to a third party (the provider) at a discount (less than face value or death benefit). Ownership of the policy passes to the provider. The provider also becomes the new beneficiary. When the insured (viator) dies, the face value goes to the provider. The provider, who is usually a viatical settlement company, pays the premiums on the policy until the death of the viator. The provider may then securitize the viator's policy with other policies they have purchased and sell interests in the pool, similar to a mutual fund. The provider will require detailed information about the policy. They will want to see the viator's health records and will check up on the viator's health on a regular basis. At the viator's death, they will require a copy of the death certificate.

The viatical industry developed in the 1980s in response to the AIDS crisis. In the early years, viators (insured persons) were usually victims of AIDS who died within a few months of diagnosis and were in need of money to pay for their care [Page 975]during those months. By the year 2000, AIDS victims were living longer due to new drug therapies, and the market shifted to include the chronically ill and elderly who needed funds to pay for assisted living. Another market has been wealthy elderly people who had purchased large policies when their children were young and who wanted some income from their non-income-producing life insurance policy, as they no longer needed to provide for minor children.

A viatical settlement is different than a clause in a life insurance policy to accelerated death benefits. Under the terms of the life insurance policy, the life insurance company pays out a percent of the policy's face value while the insured is still alive, and the remaining amount is paid to the policy's beneficiaries at the time of the insured's death. A person will usually receive greater financial consideration from a viatical settlement than from accelerated death benefits, but the original beneficiaries of the policy will receive nothing under a viatical settlement, whereas they will get some compensation when using accelerated death benefits. Ownership of the policy changes with a viatical settlement; it does not change with accelerated payments. In both cases, the insured usually receives more money than they would if they surrendered the policy.

Prior to 1996, the money received from a viatical settlement was taxed as ordinary income, whereas payments to a beneficiary at the death of the insured were received income tax-free. Under the Health Insurance Portability and Accountability Act (HIPAA) of 1996, the payments received under a viatical settlement are received tax-free up to the amount paid in premiums over the life of the policy if the person receiving the proceeds has an illness or physical condition such that death can “reasonably be expected” to occur within 24 months, as estimated by a physician. The physician has to attest that there is at least a 70#x0025; chance that death will occur in the 24-month period. The letter is only needed if there is an IRS audit, but should be asked for at the time of the sale. In addition, the funds must be paid by a licensed viatical settlement provider if the state requires providers to be licensed or comply with the National Association of Insurance Commissioners (NAIC) standards. The NAIC model requires disclosure, escrow accounts, a rescission period, and pricing minimums. There are no restrictions on the use of the funds.

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