Life insurance policies can actually benefit their owners while they're still alive.
In a viatical settlement, a person called the "viator" sells off his or her life insurance policy to a third-party viatical settlement company, called the "provider," for a lump-sum payment representing a fraction of the policy's face value. At that point, the provider becomes the beneficiary of the policy and takes over responsibility to pay the monthly premiums. When the viator dies, the provider then receives the full value of the policy.
History
Patients facing mounting medical costs can consider viatical settlements.
Viatical settlements can be viewed as a relatively new solution to an old problem: those diagnosed with serious illnesses face mounting medical bills while often unable to work as much as before, or at all, to offset those rising costs. These settlements first gained notoriety in the 1980s as the incidence of AIDS cases skyrocketed. Many of those afflicted with AIDS were young to middle-aged men who did not have children or spouses to worry about providing for after their deaths. And because they did not have enough retirement income to draw upon to see them through the deepening morass of medical bills, they had to find another way to fund their medical expenses. Those who had life insurance policies began selling them off to meet their more immediate financial needs.
As of 1989, only three investment firms specialized in the procurement of viatical settlements, compared with today's billion-dollar industry with more than 50 firms dealing in this type of settlement. Expectations are for this industry to evolve and grow still further as people live longer and medical costs continue growing.
Considerations
A viator receives a percentage of the life insurance policy's full face value.
The actual process of selling a life insurance policy is called to "viaticate." This process can be confusing, especially to those completely new to the idea. Viatical settlements can vary from state to state. The viatical industry is regulated on a state level, but some states don't regulate it at all. The first place to look to when considering a viatical settlement is your state's department of insurance, since these state agencies are the ones in charge of regulating viatical settlements---or not, as the case may be.
The process of viaticating typically begins when a terminal patient consults a broker, who helps negotiate the sale of the life insurance policy. Much more rarely, the policyholder will negotiate the sale to a viatical provider with no third-party broker involved. Depending upon a viator's life expectancy, he can expect to receive approximately 60 to 80 percent of the policy's face value. He then names the viatical provider as the beneficiary of his policy, and the provider takes over payment of the insurance premiums.
HIPAA
Under HIPAA, viatical settlement proceeds are tax-free up to the actual paid premium amount.
Under the Health Insurance Portability and Accountability Act (HIPAA), the proceeds garnered from viatical settlements for the chronically or terminally ill are tax-free up to the actual paid premium amount over the life of the policy. According to the HIPAA, terminally ill means a patient has received a diagnosis "by a certified physician to have a life expectancy of under 24 months." Being chronically ill under HIPAA means the patient has become "permanently and severely disabled by an illness."
Settlement
Concern began mounting in the 1990s about the potential for abuses in the growing viatical settlement industry. The National Association of Insurance Commissioners (NAIC) stepped in and developed the Viatical Settlement Model Act and Regulation from 1993 to 2004. Over the years, up to 40 states have adopted some version of the Model Act. Government regulation of viatical settlements involves several areas, such as licensing requirements for brokers and providers, annual reporting requirements, requirements for filling out of forms, approval requirements, prevention of fraud, and privacy restrictions on disclosing the financial or medical information of an individual.
Regulatory Concerns
The life insurance industry is an ever-evolving one.
As the viatical settlement industry evolves, so, too, does the Model. It has been amended extensively and will no doubt continue to change. One trend receiving more scrutiny over the past few years is that of investor-owned life insurance, which involves companies convincing an individual to apply for life insurance, at which point the investor company pays the policyholder a lump sum to purchase the policy and then, in turn, resell the policy to new investors. This type of investment is often called a "wet ink" scheme because the ink barely has time to dry on one sale of the policy before it's sold off again. Another potential pitfall with investor-owned life insurance policies is the increased chance for fraud, either by falsifying information on an application so that a person who would otherwise not qualify for life insurance is able to buy the policy, or by the investor companies' inducing an otherwise-healthy individual to purchase the policy and then failing to disclose to third-party investors the truth about that individual's life expectancy.
Tags: life insurance, insurance policy, life insurance policy, viatical settlement, face value, insurance policies, life expectancy
