Life & Viatical Settlements
Chapter 1
Understanding the Product
Viatical Settlements are not for every investor. They were created by wealthy investors looking for higher investment returns. Backed by large credit lines, they formed companies known as viatical funding firms. These firms buy directly from the sellers, and then open up the viaticals for investors.
So, exactly what is a viatical product? They are life insurance policies, but in this form of use, they become investments. Viatical settlements allow investors to invest in another person’s life through their life insurance policy. The investor might purchase the policy entirely or a part of it, with other investors also purchasing a portion of the same policy. When the insured dies the investors collect the death proceeds. The investor’s returns depend upon the insured’s life expectancy and the actual date he or she dies. If the insured lives longer than expected, the investor’s returns are lower; if the insured dies sooner than expected, the investor’s returns are higher (due to the length of time premiums and other expenses are paid). It is possible to lose part of the principle in viatical settlements if the insured individual lives much longer than expected since it is the investors that continue to pay the policy premiums.
Investors buy as low as possible and if all goes well collect high returns in the form of death benefits when the insured dies. One could say the investor is investing in the death of the terminally ill insured. Through this investment, the viatical firm provides cash to the terminally ill individual who has transferred (sold) his or her rights to receive the death benefits.
The policy owner who sells the policy is called the viator. The insured and the policy owner may not always be the same person; it is the policy owner who has the right to sell the policy, not necessarily the insured. It is usually the policy owner who contacts the viatical funding firm as the result of an advertisement they or their family has seen. Viatical funding firms spend thousands of dollars advertising the availability of cash for the death benefits in life policies held by terminally ill policy owners. These advertisements appear in many locations, but especially in magazines that target elderly individuals and the gay community. You may also see advertisements in local papers announcing area seminars. These seminars have two purposes: to obtain life contracts from terminally ill people and to promote investments in the policies.
How do Viatical Settlements Work?
Most providers, provider representatives, and brokers will ask the policy owner (viator) to complete an application and medical release forms so the life or viatical firm can gather information from their life insurance companies and doctors. All acquired information must be kept confidential and cannot be given to anyone without the insured’s written approval. If the insured individual qualifies, the provider will make an offer for their policy. The amount offered will be based on specific facts, such as how long the insured person is expected to live, the amount of the policy premiums, the rating of the issuing insurance company, and the policy’s provisions, such as waiver of premium clauses. If the policy owner accepts their offer, he or she will be asked to sign a viatical settlement contract.
Purchasing Partial Policies
While the entire policy is often purchased, that is not necessarily required. The policy owner can sell the entire policy face value or only a portion of it. If only a part of the policy is sold, the policy owner will be required to assign or transfer only the part being sold. The provider will become the new owner of the policy and the insured’s chosen beneficiary will retain the rights to the unsold portion of the policy.
The Difference between a Broker and Provider
There is a difference between a life or viatical settlement broker and provider. Although both a broker and a provider will help the viator with the sale of their policy, there are important differences between the two. A broker works for the viator. A broker will check with several providers to find the best offer available for the policy. A provider represents the investors. A provider will only make one offer for the policy, based on their internal funding parameters. If the insured uses someone to help with the sale of their policy, he or she may want to ask whether the individual is a broker or provider. It is important to know!
Viatical Participant Confidentiality
All personal information should remain confidential, even from investors. Any financial, medical, or personal information obtained by a provider or broker, including names of family members, spouses, or other significant individuals, may not be shared with anyone unless the viator has given written approval for sharing information. Any written approval for the sharing of this information must show who may get the information and why it will be released.
When viatical settlements first originated in the 1980s, many of the terminally ill insured individuals were from the gay community. Battling AIDS was difficult enough; they certainly did not want their identity and private medical and financial information made available to others.
Regardless of the situation however, anyone who is ill does not need any additional stress. There were actually cases where investors began calling the viator to see if he or she was still alive. Many states now have legislation in place to protect the viator from loss of privacy.
While language will vary, such legislation will still be substantially similar in content. It will state that, except as otherwise allowed or required by law, the provider, broker, purchaser, insurance company, or any other involved person who has knowledge of the viator’s identity may not disclose it to any entity or person that does not have a legal basis for receiving it. An authorized person would not include anyone who has or may have a financial interest in the settlement contract (an investor).
Paying the Viator
Different companies may have different procedures for paying viators for their life insurance policies. Some providers use escrow agents or trustees to handle the money used to purchase life contracts. The escrow agents or trustees usually send the money to the viators within three business days of the date the insurance company confirms to the provider that the transfer of ownership has been completed.
Buyer’s Remorse
If the viator changes his or her mind about selling their policy, he or she can cancel their life settlement contract at any time up to the date allowed in the contract or by state statutes following receipt of the money from the provider. If the viatical contract is canceled, it is important to remember to make sure ownership of the policy was transferred back to the policy owner. Each state may have specific requirements when contracts are canceled. Usually the state insurance department can provide exact details.
When Death Occurs Soon After Selling a Life Contract
The exact amount of time will vary by state statute or by the policy itself (as long as it does not go against state requirements), but if the insured dies soon (usually within 15 to 30 days) after receiving the money from the provider, the settlement contract will automatically cancel. As a result of this automatic contract termination, the insured’s original beneficiaries will receive policy proceeds from the provider, less any money it already paid for the purchase of the policy and any premiums paid to the insurance company to keep the policy current.
Following Payment for the Life Policy
After the provider has paid the owner for the life insurance policy and transferred policy ownership, they may begin calling to check on the health status of the viator. In many states, the number of calls is limited, often to once per three month period, depending upon the stage of the viator’s health (how close he or she is to death).
If the viator does not want to be contacted about his or her health status, he or she may appoint an adult person or persons to be contacted on their behalf. That person must be in regular contact with the viator. The viator must give the provider their representative’s name, address and phone number. Once this information is received by the provider, they may not contact the viator unless they have tried and been unable to reach the contact person for more than 30 days. The viator may change his or her contact person at any time by sending a written notice to the provider. It is important to remember, however, that contact for the purpose of health status is necessary in order to eventually file a claim with the insurer and pay the investors following the viator’s death.
The provider must give the viator the name, address, and phone number of the person who will be contacting them (or their designated contact person) about the insured’s health status. This allows the viator or their representative to be sure the call is from the proper person. If the viator’s life is expected to end in one year or less, contacts to check on health status are typically limited to once every 30 days, depending on individual state statutes. If the viator is expected to live for more than one year, contact is typically limited to once every three months.
Checking Health Status through Physicians
Some providers will use the viator’s signed medical release forms to obtain updates on their health status through their doctors. The medical release form tells doctors they are allowed to release the viator’s medical information to the provider, their broker, or provider representative. Viator’s have the right to withdraw their medical consent in accordance with law.
Extra Policy Benefits
Some policies may contain extra policy provisions, such as waiver of premiums, accidental death benefits, or disability provisions. Policy owners may contact their insurance company or agent to confirm additional policy provisions. If the policy includes additional benefits, they may or may not be included as part of the life or viatical settlement contract. Usually benefits for accidental death would not be included as part of the viator’s settlement since death by accidental means is unlikely (he or she is already terminally ill). The additional death benefit would remain payable to the insured’s listed beneficiaries or the estate. If the policy provides future increases in the death benefit, the viator may want to ask how much the provider is paying for the purchase of this benefit. If the life policy is a joint policy or provides coverage on the lives of other family members or anyone other than the viator, there may be a possible loss of coverage for the other individuals. The viator should ask their agent about this possibility.
Other Available Options (Besides Selling the Policy)
Some life insurance policies offer options that may allow the insured to keep ownership of their policy and still meet their current financial needs. The insurance company may offer accelerated death benefits, for example, to help out with costs in some medical situations. The policy may also offer loans and surrender of the policy for its cash value. Before entering into a viatical settlement, policy owners would be wise to contact their insurance company or agent to see what options are available.
What Every Policy Owner Should be Aware Of
Entering into a life or viatical settlement contract may affect other people or even the insured or policy owner adversely. The following list is not necessarily inclusive of all adverse effects.
There may be a loss of life insurance coverage on the viator’s spouse or other family members, if the policy (or any riders attached to it) covers their lives;
The amount of premiums due could change;
Policy cash values or dividends, if provided for in the policy, could be lost;
A loss of other rights or benefits, including conversion rights and waiver of premium benefits that may exist under the policy might occur;
There could be adverse tax consequences;
The viator’s ability to receive supplemental social security income, public assistance, and public medical services including Medicaid might be affected; and
The money received for the viatical settlement could be taken away from the viator by creditors, personal representatives, trustees in bankruptcy, and receivers in state or federal court.
Because of the above, individuals should contact an attorney, accountant, estate planner, financial planning advisor, tax advisor, social services agency, the issuing insurance company, or agent to find out what effect selling the policy may have on the viator and their beneficiaries or co-insured.
Viatical History
The viatical name comes from the word “viaticum,” which means provisions for a journey. We see this word in some of our religious ceremonies today, but their meaning alludes to preparing spiritually, not financially.
In ancient Greece, family members placed a gold coin under the tongue of the deceased as payment for the ferryman who would transport the deceased across the river Styx to the underworld.
Although we no longer believe we must financially prepare for death, the name has lent itself to the viatical settlement investments. Since it is linked to an individual’s death, the name is appropriate.
Viatical companies determine profits on the difference between what they paid the insured for the death benefits and the full death benefits received. Obviously, the insured is not paid the entire death benefit, but rather is paid a percentage of the full death benefit. Exactly what the insured is paid will vary based on several factors, such as any existing policy loans, whether or not the policy is paid up, and so forth. The discounts are steep even under the best circumstances, but for the terminally ill patient the income provided by selling their policy is often a necessity. Life insurance cash values are often less than the amount received by selling their policy to a viatical firm, so the insured individuals do not mind receiving substantially less than the death benefits.
Although viaticals have existed in some form for some time, they were not known in the U.S. until the mid 1980’s. Today they have become so popular that many states either already have or will draft consumer legislation to control how they are represented and sold. Although the item being sold is a life insurance contract it is not necessarily a licensed life agent that will represent viatical settlements. While life insurance agents may be involved, an insurance license is not required in most cases. Therefore, it could be a life insurance agent representing the product, but it could also be the consumer’s postal carrier, or any other individual.
States are beginning to pass consumer legislation regarding viatical settlements because there has been so much incorrect information regarding these investments. While some of the wrong information may be intentional (to sell the product), much more has been unintentional because those promoting viaticals are often misinformed themselves.
Many viatical companies have offered finder’s fees. Even some surprising professions have cashed in on the referral fees, such as doctors and attorneys. In many cases these professionals were not looking at the referral fees; they were referring their clients because they realize it is the only avenue open to such individuals to obtain badly needed cash. In response to this, however, many states have banned referral fees to professionals whose primary role is advisor or caretaker to the viator.
Not every terminally ill person with a life insurance policy will find a buyer for their death proceeds. Screening viators begins with the application process, just as it does for a newly written insurance application. As with insurance, the viatical application will eliminate some applicants immediately since they do not meet the requirements stated in the application. Each viatical funding firm will have their own specifications, although all of them will have similarities. Simply being ill is not sufficient. The illness must be acceptable to the viatical funding firm, with a physician stating an anticipated time of death. Each company will set its own standards for anticipated times of death. One company may purchase contracts that have longer anticipated times of death while others will purchase only life contracts that are expected to pay out within six months.
Obviously, not all life insurance policies will be acceptable. Some contracts, for example, may contain restrictions that are not acceptable. If the insured has policy loans out, that might also be unacceptable to the viatical funding company.
Viatical settlements utilize underwriting in order to analyze the risks involved with the investment. There are two major areas of risk for the viatical funding firm: medical and insurance. Each of these two elements will be individually underwritten. By analyzing the risks involved, the viatical funding firm will be able to put a cost on their risk, so they then know (1) if the risk is acceptable, and (2) what the investors must invest (pay) for their portion of the investment.
Medical Underwriting
Since the investment is based upon the death of the insured individual it is not surprising that there would be medical underwriting. The viatical funding firm must verify the expected time of death; this will require a written statement from the attending physician. In some cases, more than one doctor must submit their statement. The medical underwriting is stricter than that used for insurance applications. Insurance is estimating their potential costs from the opposite view. When a life insurance application is taken, the insurance underwriters are looking to see how long the individual might live. The longer he or she lives, the higher their profit margin since they are collecting premiums during the insured’s lifetime. Viatical funding companies come from the opposite view – they want to determine when the insured is likely to die since their profit margins come from an early death. While the general principles are the same, how the two are medically underwritten are not alike.
Insurance Underwriting
The life insurance policy itself must also be analyzed. Some contracts will be more profitable than others. Verification of coverage (VOC) is required to confirm that the policy is still in effect and that the ill individual is the insured individual. Never would the viatical funding company merely accept the insured’s word of such. The viatical firm must also confirm that the policy is beyond its contestable period. They would never take a chance of a rescinded policy due to nondisclosure of requested information or inaccurate information on the policy application. The life insurance policy must also be assignable at full face value. By “assignable”, we mean the terms of the contract allow the policy to be transferred to another person or entity. The insured person would remain the same, but the policy ownership would be transferred.
Obviously, the policy owner would not receive full death values; that would eliminate any profit margin for the viatical funding firm. Purchase price is determined by several factors, primarily the medical and insurance underwriting conclusions. Some states have adopted model viatical law that was drafted by the National Association of Insurance Commissioners. It basically states that if life expectancy is “x”, the purchase price should be no lower than a certain percentage of the actual death benefit. Not all states have adopted these recommendations, but we are likely to see more of them doing so in the years to come.
While there may be varying opinions on the value of life insurance policies, industry professionals generally agree that the insured should receive no less than 50 percent of the death benefits. Of course, there are always exceptions, especially if there are policy loans that will reduce death proceeds. Many advisors recommend that viators search the market place, getting multiple offers before making a decision. When investor demand is high, the viator is likely to receive more than when demand is down.
In the last few years, the industry has experienced a new trend: policies purchased solely to sell in the secondary market, such as stranger-originated life insurance (STOLI). They may also be called stranger-owned life insurance policies. Stranger-Originated Life Insurance is a life insurance contract in which investors with no relationship to the insured initiate an insurance policy against their life and fund the premium payments for investment purposes.
There is a similar arrangement known as Spin-Life. Investors pay seniors to apply for life insurance and lend them the money required to buy the policies. They then sell these policies to speculators. STOLI transactions are defined as life insurance policies manufactured for the express purpose of selling them in the secondary market.
The NAIC has been looking at viatical settlements and related issues since May of 2006, with recommendations drafted regarding them, followed by occasional updates.
The terms viatical settlements and life settlements are often used interchangeably, but actually there is a distinction. Viatical settlements typically involve transactions that involve shorter life expectancies, whereas life settlements involve policy owners with possible longer life expectancies. These arrangements have been well received by many terminally ill individuals who have few financial resources in the last stages of their lives. Unfortunately, many of the viatical vehicles used were not presented in reputable style to either the ill individual or those who invested in them. That is partly why the National Association of Insurance Commissioners and the National Conference of Insurance Legislators (NCOIL) each developed model codes for viatical settlements.
Viatical settlements should not be confused with accelerated benefits that may be available in some life insurance contracts. Accelerated benefits may also be referred to as “living benefits.” These benefits are paid by the insurer directly to the insured, with the loans deducted from any death benefits paid upon his or her death. While accelerated benefits may be part of the policy, more often they are riders or policy attachments.
Policy Ownership Transfer
Once an offer has been made and accepted by the viator, transfer papers are sent out to the policy owner. All policy rights will be transferred to the viatical funding firm using an Absolute Assignment form. The beneficiary designation will also be changed since that is going to be the investment benefit portion of the viatical settlement. Instead of Aunt Mildred or daughter Cindy receiving any benefits upon the insured’s death, those who invest in the policy will receive the death proceeds. The viatical company’s Release of Liability form will also be sent to the insured, releasing the viatical funding firm from any liability resulting from policy transfer. The release form must be signed by all current beneficiaries. This release form may also be called a “Release of Beneficial Interest” since all beneficiaries are releasing their rights to any of the death proceeds. In most cases, this form must be notarized ensuring that all beneficiaries did actually sign off.
While all transfer forms are important, the Release of Liability form may be the most important. Once beneficiaries sign and have their signature notarized, they have no legal standing to sue the company or investors to recover their inheritance. Only if the entire transaction turned out to be illegal would they have any legal recourse.
All the required forms are returned to the viatical company, copied, and sent to the insurance company. The insurer must then return the forms showing the new policy owner and the newly listed beneficiaries. Investors will also receive copies to prove the legal work has been completed. If there is a sole owner of the policy (rather than multiple owners) he or she should receive the original insurance policy. Co-owners will receive copies of the documents.
Policy Premium Payments
If premiums continue to be required, the viatical funding company will pay them rather than the insured. Some policies have what is called a “disability wavier of premium” that states premiums are waived after the insured has been totally disabled for six consecutive months. Of course, this must be proven to the insurer with physician statements and medical evidence. A disability waiver may also be called a “premium waiver.”
While premium waivers may be part of the policy, more often it is a rider or attachment that was purchased by the insured, usually at the time of policy application. They are common to both group life policies and individually issued life insurance policies. Waivers of premium must be continually qualified, meaning the insured must reaffirm a continued disability at specified intervals, such as every six months. If the policy has been sold to a viatical company, such qualifications continue to apply. Once sold, the waivers will require signatures from both the viator and the treating physician, just as it did prior to the sale.
If the policy contains a waiver but it has not been activated for some reason, the viatical company is sure to have it activated as soon as possible. Often the insured individual has not read his or her policy sufficiently and is not even aware the rider exists. As a result, the required documentation was not sent to the issuing insurance company. It is also possible that the required length of time has not yet been satisfied.
For example:
Paul Policy owner was just diagnosed with terminal cancer. His cancer is already advanced and his doctor believes he only has three to five months left to live. His life insurance policy requires certified disability for a continuous six months. Paul will not be able to activate the premium waiver for six months. He is likely to die prior to the six month total disability requirement.
Some terminally ill individuals continue to work, if only part time. They probably need all the income available to them so working will provide this. If the insured is working, even part time, the premium waiver does not apply. Therefore, even if such a rider or attachment exists, the viatical settlement company may not be able to benefit from it.
Policies that do not contain a disability waiver of premium are likely to have premiums still due. Policies having the disability waiver of premium clause will have premiums due as well if the insured has not met their disability requirements. The viatical company or its escrow agent will apply to activate the waiver (if one exists) as soon as eligible, but in the meantime they cannot allow the policy to lapse due to nonpayment of premiums.
Although the viatical settlement firm sends in the premiums on the policy to ensure it does not lapse, in many cases it is still the insured that ends up paying for them. Many viatical settlement agreements require the cost of future premiums to be subtracted from the policy purchase price. Most states having laws on viaticals require viatical settlement offers to include a net offer, meaning the actual amount to be received after premiums have been deducted. The premiums that have been deducted are typically placed into an escrow or custody account.
If escrowed premiums are not totally used because the insured died sooner than expected, the remaining funds will normally be kept by the viatical company. Many viatical companies use excess premium dollars from one account to apply to another where the insured is living longer than expected.
Each company will have its own formula for determining the amount of premiums that will be needed prior to the death of the insured. There may also be factors unique to the situation, such as the amount of premium, policy cash reserves, or other factors. Premium rates are also individual since they are based on the facts disclosed in the original policy application. An applicant having existing medical conditions at the time of application, for example, may have been charged a higher premium rate than another healthy individual buying the exact same contract.
Premiums on issued life insurance policies are affected by several factors, including:
Age at the time of application;
Whether the policy is a current age or renewable term contract (meaning premium rates change periodically, usually upon the policy anniversary date);
Gender
Type of insurance issued, such as term or whole life policy;
Whether it is a group or individual contract;
Policy rating at the time of application (existing medical conditions, lifestyle, or health rated issues); and
Additional riders or attachments purchased that increased premium cost.
Certainly, any investors in the policy should require confirmation of all premiums paid. If the policy is allowed to lapse, the investor will not receive the portion of death benefits owed to him or her. Every viatical investor should absolutely require premium payment confirmation each and every month premiums are due. States that have enacted viatical legislation have implemented investor safeguards, but the smart investor will still require some condition in the contract that ensures premiums are paid in a timely manner. A lapsed policy will mean the entire investment is lost, including principle in most cases.
If the premium changes due to the type of policy issued, the viatical company must keep abreast of such changes. Mistakes can happen, so the wise investor will take the time to make sure premiums are current and correctly paid.
If the viator lives longer than anticipated (a common occurrence) the investors must then pay to keep the policy in force in many cases. Again, if premiums were not paid the policy would then lapse and all investors would lose the amount invested. When there is only a single investor in the policy it is usually not difficult to make sure the policy stays effective through payment of premiums. It can be more difficult when there are multiple investors in a single policy. Viatical companies have gotten smarter at collecting when necessary, but multiple investors present more work when premiums are prorated among them. Investors must know how one person’s failure to pay premiums will affect them.
Note: it is very important to know your state’s laws. This course is not offering legal advice. As a professional you must know what laws affect viatical settlements in your state. Laws change periodically, usually with consumer protection in mind.
Outstanding Policy Loans
Any policyholder might take out a policy loan against the contract’s cash values, but those with illness are especially likely to have done so. While this would have been reflected in the amount paid to the viator, it also affects the investors. A policy loan might affect expenses that are passed on the investors. For example, there may be annual loan costs that must be paid. Some contracts might charge the viator for these expenses, but it is something investors must be aware of in case it affects their investment.
Many policy loan costs will affect the viator rather than the investors. Such expenses might be collected along with the premiums that will come due and be placed in the escrow or premium reserve account. In many cases, how extra expenses are handled will depend on the contract the viatical company uses, meaning it can vary from contract to contract. Investors are most likely to incur these expenses if the viator lives longer than expected so that the loan expenses previously collected are inadequate. Once the fund is exhausted, investors would then be expected to pay these costs as well as any premiums due.
Additional Investment Fees
Any contract can have investment fees; it is up to the investor to read any contract well before signing on the dotted line. In the past some viatical settlement contracts seemed to purposely avoid expense disclosure. Since these investments seldom (if ever) return the investment principle it is important to know what is involved before investing. Many types of investments have fees, but such fees should always be fully covered by the selling agent.
Some viatical contract fees may be called “policy servicing fees” or similar wording. This might include such simple things as paying the premium each month and routine paperwork. It could also include filing for disability premium waivers, converting a group policy over to an individual contract or distributing fees upon the death of the viator.
Additional fees may exist for an important part of the viatical contract process: tracking the viator (insured) through their illness. As the viator gets closer to death it is unlikely that he or she will be well enough to keep track of physician statements to maintain the disability waiver, for example. Waivers must include the viator’s signature so the viatical company must know where he or she is. Ill individuals do not always remain at the same address. As their illness progresses, they may be moved to a hospital, hospice facility, or nursing home - all of which must be tracked.
Tracking viators is not necessarily difficult. It may be as simple as preprinted postcards that are given to the viators. These are filled out and mailed in periodically. However, it has been reported that as many as 30 percent of the viators move; postcards depend upon the viator following instructions and continuing to keep in contact.
Viatical firms may also utilize relatives or friends that agree to be a contact during the final months of the viator’s life. The viatical funding firm will contact these individuals periodically for updates, often on a monthly basis.
While tracking the viator during their last months of life may sound cold hearted, it is vital to do so. The viatical company and their investors will not receive any death proceeds without a death certificate so maintaining contact is critical. As illness progresses, the insured are likely to move to be near their family or to a climate that makes their final days more comfortable. As they move, physicians change. Viatical companies could easily lose track of the insured if such arrangements were not in place.
Viatical companies do sometimes lose contact with the viators. When contact is lost it has the potential of leaving investors with nothing if the individual cannot be located so that death can be verified with a death certificate.
Some companies contract with services that are established to track the viators. These companies have procedures in place designed to follow the ill individuals as they move from place to place or through the medical channels.
Escrow Trust Accounts
The very nature of viatical settlement contracts require escrow or premium reserve accounts. Whatever name is used, they are required to hold funds for coming premiums and other insurance contract costs. On the surface, they are used to keep funds safe until the insured viator dies and the death proceeds are dispersed. Unfortunately, not all escrow accounts are set up to protect the investors. There have been cases where the accounts were managed by persons or entities that have conflicts of interest.
Some escrow accounts have been set up in a person’s name. Even when intentions are good, this is dangerous for the investors. For example, let’s say the account is set up in the name of the attorney who drafts the viatical settlement contracts. The attorney then experiences legal problems; perhaps it is a messy divorce, bankruptcy, trouble with the IRS over taxes paid, or a lawsuit filed against the attorney. Whatever the case, the courts could decide the escrow account is part of the attorney’s assets and subject to settlement payments.
Viatical and Life Settlement Disclosures
Many states now have specific viatical and life settlement requirements. Generally, providers and brokers must provide the viator with specified disclosures regarding the contract with each viatical settlement application. These disclosures must be provided in a separate document that is signed by the viator and the provider or broker. The disclosures may vary from state to state, but generally they include the following:
There are possible alternatives to contracts including accelerated death benefits or policy loans offered under the viator’s policy.
Some or all of the proceeds of the viatical settlement may be taxable under federal and state tax code. Assistance should be sought from a professional tax advisor.
Proceeds of the viatical settlement could be subject to the claims of creditors.
Receipt of the proceeds of a viatical settlement may adversely affect the viator’s eligibility for Medicaid or other government benefits or entitlements, and advice should be obtained from the appropriate government agencies.
The viator has the right to rescind a contract within a specified time period following receipt of the viatical settlement proceeds. If the insured dies during the rescission period, the settlement contract is rescinded subject to repayment of all viatical settlement proceeds and any premiums, loans and loan interest to the provider or purchaser.
Funds will generally be sent to the viator within three business days after the provider has received the insurer or group administrator’s acknowledgment that ownership of the policy or interest in the certificate has been transferred and the beneficiary has been designated. The time period may be based on state statutes so it is important for participants to know what their state has stipulated for the allowable payment time period.
Entering into a contract may cause other rights or benefits, including conversion rights and waiver of premium benefits, to be forfeited by the viator. Assistance should be sought from a financial adviser.
Viators must be informed (usually by use of a brochure) of the viatical or life settlement process so they know what to expect.
The disclosure document must be similar to the following language in most states: “All medical, financial or personal information solicited or obtained by a provider or broker about an insured, including the insured’s identity or the identity of family members, a spouse or a significant other, may be disclosed as necessary to effect the viatical settlement between the viator and the provider. If you are asked to provide this information, you will be asked to consent to the disclosure. The information may be provided to someone who buys the policy or provides funds for the purchase. You may be asked to renew your permission to share information every two years.”
The insured person may be contacted only by the provider, broker or its authorized representative for the purpose of determining the insured’s health status. This contact is limited to once every three months if the insured has a life expectancy of more than one year and no more than once per month if the insured has a life expectancy of one year or less. These time periods are typical, but since states can vary, again it is wise to know your own state’s requirements.
Generally, providers must provide the viator with any required disclosures no later than the date the contract is signed by all parties.
There are additional disclosures that must be conspicuously displayed in the contract or in a separate document signed by the viator and the provider or broker:
The affiliation, if any, between the provider and the issuer of the insurance policy to be viaticated including the name, address and telephone number of the provider.
A broker shall disclose to a prospective viator the amount and method of calculating the broker’s compensation. The term “compensation” includes anything of value paid or given to a broker for the placement of a policy.
If an insurance policy to be viaticated has been issued as a joint policy or involves family riders or any coverage of a life other than the insured under the policy to be viaticated, the viator shall be informed of the possible loss of coverage on the other lives under the policy and shall be advised to consult with his or her insurance producer or the insurer issuing the policy for advice on the proposed viatical settlement.
The dollar amount of the current death benefit payable to the provider under the policy. If known, the provider shall also disclose the availability of any additional guaranteed insurance benefits, the dollar amount of any accidental death and dismemberment benefits under the policy and the provider’s interest in those benefits.
End of Chapter 1
United Insurance Educators, Inc.