| Introduction
A viatical settlement allows individuals facing life threatening
illnesses--such as cancer, severe heart disease, AIDS, Alzheimer's
disease or others--to sell their life insurance policy to a third party
for cash, while they are still able to use the money. There are no
restrictions on how funds from a viatical settlement can be used. The
company purchasing the life insurance policy then becomes the
beneficiary and is responsible for making all future premium payments to
keep the policy in force.
Viatical settlements are one of a select number of insurance related
financial options available to individuals facing a life-threatening
illness. One other option, called an accelerated death benefit (ADB), is
included as a rider in some life insurance policies. Only a small number
of policies have ADB riders and they are more restrictive regarding
medical condition than viatical settlements. Nevertheless, an ADB, when
available, can be a viable financial option for an individual facing a
life-threatening illness.
The major advantage of a viatical settlement to those with
life-threatening conditions is the ability to tap significant financial
resources when they are most needed -- particularly to pay for very
expensive medical bills not covered by their medical plan. The soaring
cost of health care in the last few decades is well documented: In 1965,
the per capita medical expenditure was $205, representing 5.9% of the
GNP; by 1990, that figure had jumped to $2,511 per person, or 12% of the
GNP. Americans currently spend about $900 billion on health care.
In cases of long-term or life-threatening illness, such as cancer or
Alzheimer's disease, the cost of hospitalization, treatment, home care,
and other expenses can be staggering. Health insurance, Medicare, and
Medicaid may not be sufficient in many cases. Given that a seriously ill
person can no longer work and usually has significant financial
obligations, this situation can ravage an individual's or a family's
life savings. In fact, it is estimated that two-thirds of American
families would soon be financially insolvent if the head of the
household were to become seriously ill.
Many health care professionals are not yet aware of viatical
settlements. According to a recent survey of 500 case managers and
nurses conducted by the Maritz Corporation in Oak Brook, Illinois, 85%
of respondents had never heard of a viatical settlement. However, 92% of
those surveyed said that in last year they had seen at least one patient
facing a life-threatening illness who was unable to meet his or her
financial obligations.
A Brief History of Viatical Settlements
The term "viatical settlement" comes from the Latin word
"viaticum" meaning "provision for a journey."
Viaticum were the supplies that Roman soldiers were given in preparation
for their journeys into battle, ostensibly, journeys from which they
might not return. In short, viaticum were the supplies soldiers
presumably needed for the closing phase of their lives. Similarly, a
viatical settlement also provides individuals with resources for the
final journey of their lives.
Initially, the viatical settlement industry was comprised of an
informal network of small companies primarily serving the AIDS
community. Many firms were essentially little more than speculative
ventures or "brokers" who often lacked the capital resources
necessary to ensure fair, timely payouts to patients. Like a real estate
broker, a viatical settlement broker represents the viator--the
individual selling his or her life insurance policy-- to potential
investors who would "bid" on purchasing the policy in the hope
of making a profit. By definition, a broker is an individual who takes a
percentage--sometimes up to 6, 10, or 15% to broker a transaction.
The Viatical Settlement Industry Today
In 1994, the first viatical settlement company owned by a major life
insurance company entered the market, bring institutional-scale capital
to the industry and eliminating the need to "raise money" or
find individual investors for policies. The company, Viaticus, Inc.,
which is owned by CNA Financial Corp. (parent of CNA Insurance
Companies), holds all policies they purchase as a large corporate
portfolio. It is widely accepted that this approach represents the
future of the viatical settlement industry and eliminates the
"brokering" of life insurance policies to investors who are
simply looking for speculative returns.
As the viatical settlement industry moves into the mainstream of
insurance products, there is also a trend toward increased government
oversight and regulation. Individuals facing a life-threatening illness
are the most vulnerable members of society. Mainstream viatical
settlement companies welcome this trend, believing that responsible
regulation of viatical settlements is in the best interest of viators,
their families, and the viatical settlement industry.
In December 1993, the National Association of Insurance Commissioners
(NAIC) adopted the Viatical Settlement Model Act and drafted a Model
Regulation to guide the viatical settlement business. Viatical
settlement industry leaders worked with the NAIC to develop both the Act
and the Regulation to assist state regulators across the nation in
proposing or enacting regulations to protect viators.
Among the goals of the NAIC model law are to ensure that (1) viatical
settlement companies inform patients of the implications of the viatical
settlement, and (2) to provide guidelines for fair payments to
policyholders. The act directly addresses many of the early reported
abuses of the viatical settlement service, including the need for clear
disclosure of information that will enable the patient to make a fully
informed decision.
Viatical settlement companies are available in all 50 states. Some
leaders in the viatical settlement industry have met with state
insurance regulators across the nation to promote regulation to benefit
and protect people with life-threatening illnesses. Several states have
adopted or are considering specific regulations or provisions including:
o State and city tax- free treatment of viatical settlement proceeds
to encourage use of this important new service.
o Requiring licenses and other strictly enforced reporting mechanisms
for viatical settlement companies and limiting licenses to companies
with well established operations.
o Requiring viatical companies to maintain a minimum level of capital
or surety bond to fund the purchase of life insurance policies as part
of the viatical settlement process. This helps ensure that companies can
fund settlement and prevents the involvement of viatical settlement
companies that may put people at risk.
o Preventing the "brokering" of life insurance policies to
individual investors who are looking for speculative returns without due
regard for the policy owner's welfare.
The Viatical Settlement Process
If a person has been diagnosed with a life-threatening illness and
his or her life insurance policy has been in force beyond the
contestable period (generally two years), he or she may be eligible for
a viatical settlement. Most policies can be viaticated, including term,
whole or universal life, or an employer group policy.
Most larger viatical settlement companies purchase policies from
individuals with a projected life expectancy of from six months to five
years. When a policy is purchased, the viatical company assumes
ownership and becomes the beneficiary of the policy and is responsible
for all premium payments to ensure the policy remains in effect. The
company receives the death benefit upon the viator's death.
Viatical settlement companies require a potential viator to complete
an application which--in addition to providing basic demographic
data--allows the company to access the patient's medical records.
Following a review of the medical records by one or more physicians, an
underwriting--or purchasing--decision is made.
After the policy is underwritten, the viatical settlement company
will submit an offer to purchase the policy. The amount of money
companies will pay for a policy depends on several factors, including
the projected life expectancy of the patient, the cost of future premium
obligations and prevailing interest rates. Some states have adopted
pricing guidelines established by the National Association of Insurance
Commissioners (NAIC). Under these standards viators generally receive
between 50 to 80 percent of face value (Table 2). Generally, the longer
the life expectancy, the less the viatical settlement company is likely
to pay for that individual's policy because the company must assume
responsibility for maintaining the policy for a longer period of time.
Once the policy is "viaticated"--or sold--it is imperative
that the financial proceeds be distributed to the viator either through
a wire transfer or company check to ensure a secure transfer of assets
and allow viators immediate access to the funds. Viators can use the
funds for any purpose such as paying for medical treatments, keeping
their home, or even paying day-to-day living expenses.
Reputable viatical companies offer a recision period--generally 15
days--within which an individual may decide not to viaticate, retaining
ownership of his or her life insurance policy.
The Need for Financial Planning
It is critical that viators understand their options and make
well-informed decisions regarding the financial implications of
viatication.
The proceeds from a viatical settlement may also impact certain
means-based entitlement programs, such as Medicaid. Other programs may
not be affected. Potential viators should contact their financial,
estate planner or obtain other expert advice regarding taxes and
government entitlements.
Several larger viatical companies have organized an ongoing lobbying
effort in Congress in support of legislation allowing tax-free treatment
of viatical settlements in all circumstances.
Stability in a Time of Need
Facing a life-threatening illness is overwhelming enough without also
having to suffer the financial hardships that steal freedom and dignity
from precious days. A viatical settlement is one way to help people
restore control over their lives by providing valuable financial
resources in their time of greatest need.
For more information on viatical settlements, please e-mail us at info@vspi.com
or Contact The Viaticus Authorized Representative at:
Stephen M. Watson
VSPI
1910 Byrd Avenue, Suite 203
Richmond, VA 23230
Toll Free: 1-888-321-9057
Direct: 804-673-2991
Fax: 804-673-1111
Summary
* A viatical settlement enables a
person facing a life-threatening illness--such as cancer, AIDS,
Alzheimer's disease or heart disease--to sell their life insurance
policy for cash, when additional financial resources are most valuable.
* The process of viaticating is
simple and usually only requires completion of application form. With
the applicant's permission, medical records are reviewed and an
underwriting decision is made. Funds are usually distributed within a
few weeks of approval.
* Almost any life insurance policy
may be viaticated including term, whole or universal life, or an
employer group policy.
* The viatical settlement industry is
regulated. Currently, regulation, or proposed regulation exists in
approximately 20 states.
* Be cautious of viatical settlement
brokers who search for individual investors to funds policies--these
brokers have sometimes created delays and legal complications.
* Locate a viatical settlement
company that offers a 15 day recision period that allows an individual
the flexibility to change their mind before fully viaticating their life
insurance policy.
* Potential viators should consult
with a financial or estate planner to determine if a viatical settlement
is the best option for their individual needs and situation.
Question and Answer
Steven Arenson, Vice President, Viaticus,
Inc.
1. Can a viatical settlement be structured so
that it does not adversely affect needs-based entitlements, such as
those from Social Security disability?
A: Yes. Great care should be taken to understand the impact of the
viatication before it is undertaken.
2. Can the money from a viatical settlement be
used for a potential life-saving procedure, such as a bone marrow
transplant or heart transplant.
A: Yes. There are no restrictions on how the funds may be used.
3. What happens if a viator lives beyond their
life expectancy?
A: Absolutely nothing happens. The viator has already received the
funds and is free to spend the money throughout his or her life.
4. Do applicants have to provide information
about their financial status at the time of applications?
A: Only basic personal information and medical records are requested.
In addition, applicants should not have to submit to a physical exam or
a separate blood test.
5. Are there fees for applying for a viatical
settlement?
A: Generally, no. Viators should be very cautious in dealing with any
request to pay application fees.
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