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VIATICAL SETTLEMENTS: LIFE INSURANCE AS A SOURCE OF FUNDS
By: Stephen M. Watson, Esq.
What do you do when a friend is stricken with a serious illness and
comes to you for help? Your first reaction is likely to be
emotional--shock, grief, despair. These reactions are only natural. But
your friend will be looking to you for more than sympathy. Your friend
will need your help.
Now there is a new law that can provide financial relief to
individuals and families at a time they may need it most.
Effective January 1, 1997, Congress enacted The Health Insurance
Portability and Accountability Act of 1996, which allows individuals
with a terminal or chronic illness to sell their life insurance policies
(or even part of a policy) to a third party. The funds the individual
receives would be free of federal taxation. There are no restrictions on
the use of the funds received. The money can be used to pay medical
bills or other health care costs, or for such things as taking a dream
vacation or funding a new business for a loved one.
The process of selling an insurance policy to a third party is known
as a "Viatical Settlement," and the third party companies who
buy the life insurance policies are known as "Viatical Settlement
Companies," or "Viatical Settlement Providers." The word
"viatical," coined by a financial planner, has its root in the
Latin word "viaticum," which applied to the practice of
supplying soldiers with provisions for their long journeys.
How does a Viatical Settlement work? First, an application is
submitted to a Viatical Settlement Broker, and the individual's medical
records are reviewed on a confidential basis. A Viatical Settlement
Company then gives a quote which the individual can accept or reject.
Quotes can be for as high as 85% of the policy's face value, depending
on the insured's life expectancy, prevailing interest rates, and future
premium payment obligations of the policy. If the applicant accepts the
quote, the money is placed in escrow for at least fifteen days to give
the applicant additional time to cancel the transaction. Once the time
period runs and the money is transferred into the applicant's account,
the Viatical Settlement Company becomes the owner of the policy,
appoints itself beneficiary of the death benefit, and assumes the
obligation of making the policy's premium payments from that point
forward.
There is no cost to obtain a quote for a policy, and one can cancel
the transaction at any time before accepting the money.
Viatical Settlements are very versatile. Any kind of life insurance
policy can be sold: term, whole life, universal, employer provided, and
split-dollar policies, to name a few. Viatical Settlements can be of
benefit for all levels of the wealth spectrum in that they can benefit
high net-worth individuals in their estate planning, and they can also
provide a financial infusion for those in desperate need of the money. A
Viatical Settlement Company may be interested in buying policies in all
kinds of situations, and the owners and their families are often
surprised by how much they can receive.
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