Viatical Settlement

Viatical settlement

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Viatical settlement

It is the sale of a life insurance policy by the policy owner, before the policy matures. Such a sale, at a price discounted from the face amount of the policy but usually in excess of the premiums paid or current cash surrender value, provides the seller an immediate cash settlement. Generally, viaticalsettlements involve insured individuals with a life expectancy of less than two years. Some people are also familiar with life settlements, which are similar transactions but involve insureds with longer life expectancies (two to twelve years).

A viatical settlement can be an innovative wealth and estate planning tool under the right circumstances. It also essentially creates an open market for redemption of a policy. For example, if the only place you could sell your Ford Motor Company stock was to Ford you would not get that much for it. The same applies to the value of an insurance policy. As long as life insurance has been around, the only place to redeem your policy was from the issuer. Now, much to the chagrin of the life insurance industry, there is an open market to determine a policy's value.

From the perspective of the investor, purchasing a viatical settlement is similar to buying a bond with a negative coupon and an uncertain redemption date. The return depends on the seller's life expectancy and when he or she dies.

Viatical settlements grew in popularity in the United States in the late 1980s, when the AIDS epidemic first hit. The early victims of AIDS in the U.S. were largely gay men, many of whom were not particularly old. They often had no wives or children (the traditional dependents in a life insurance policy), but they had life insurance policies through employment or due to other investment activity. The dependents on the policies were often their parents who did not need the money. Viatical settlements offered a way to extract value from the policy while the policyholder was still alive.

At the time, the AIDS mortality rate was very high, and life expectancy after diagnosis was typically short. Investors were reasonably sure that they would collect in a relatively short time. This combination of events caused a surge in viatical settlements as both investors and viators saw an opportunity for mutual benefit.

Vaitical settlments eventually developed a bad reputation in the investing community. The companies that purchased them from policy holders typically resold them to individual investors. Salesmen were paid large commissions to push the settlements, which were not conventional investments and which were misunderstood by many investors.

Defined:

A viatical settlement allows you to invest in another person's life insurance policy. With a viatical settlement, you purchase the policy (or part of it) at a price that is less than the death benefit of the policy. When the seller dies, you collect the death benefit.

Your return depends upon the seller's life expectancy and the actual date he or she dies. If the seller dies before the estimated life expectancy, you may receive a higher return. But if the seller lives longer than expected, your return will be lower. You can even lose part of your principal investment if the person lives long enough so that you have to pay additional premiums to maintain the policy.

Viatical settlements can be risky investments. For these reasons, you should exercise caution and thoroughly investigate before you consider investing in a viatical settlement.

Many state insurance commissioners license the companies that buy viatical settlement to sell to investors and may have information about a specific company or viatical settlements in general. To find out who your state insurance regulator is, please visit the website of the National Association of Insurance Commissioners.
http://www.sec.gov/answers/viaticalsettle.htm

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It uses material from the Wikipedia article "Viatical settlement".

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