This process allows ailing individuals access to financial resources at a critical time, for medical or daily living expenses. It also ensures that premium payments continue, preventing the risk of a lapsed policy.

Experts see substantial growth of viatical settlements in the United States continuing for the foreseeable future. Viatical settlements also are taking hold internationally wherever life insurance is a mature industry, including Europe and Japan.
 

A BRIEF HISTORY OF VIATICAL SETTLEMENTS

When this option first began to take hold in the U.S., the viatical settlement business operated more as an informal network than as a regulated financial service.

Some firms were legitimate and continue to operate today. However, others were little more than speculative ventures, sometimes without the capital resources necessary to ensure fair, timely payouts to terminally ill patients.

Another weakness was the lack of information on how viatical settlements operated. Some policyholders were not sure how much of a payout they should expect.

Nevertheless, as word spread and more people became aware of the viatical settlement option, it became increasingly clear the public was embracing the service and was quick to see its benefits.

The first viatical settlement companies primarily served people with AIDS. Today, individuals afflicted with cancer and heart disease as well as those suffering from Alzheimer's disease and other life-threatening conditions also take advantage of viatical settlements.

Individuals might learn about the option of viaticating their insurance policies from support organizations or health care workers, financial planners or insurance agents.

Health care workers and patient advocates have very positive attitudes about the financial benefits a viatical settlement can bring to their patients.

As long as ownership can be transferred, almost any type of life insurance policy can be viaticated -- individual term, whole life universal life or even an employer group policy.

A well-funded viatical settlement company should be able to viaticate any size policy, from a relatively small policy of $20,000 to one over $1 million, written by a highly rated insurance company.

The payout amount depends on several factors, primarily the projected life expectancy of the patient. Other factors include the cost of future premium obligations, policy loan payments and prevailing interest rates.

Under current industry guidelines promulgated by the National Association of Insurance Commissioners (NAIC), viators with less than six months to live would receive at least 80 percent of the value of the policy and viators with six to 12 months to live would receive 70 percent. The minimum is 50 percent at or over three years of life expectancy. A discount of 5 percent may apply if the policy is from a low-rated insurer.

Once the underwriting on a case is completed, an efficient viatical settlement company should be able to disburse proceeds into the hands of viators almost immediately. Small or under capitalized companies may have slower payout -- a significant problem when the payee is facing a life-threatening illness.
 

THE NEED FOR FINANCIAL PLANNING

Income from the viatical settlement does not affect Medicare payments, however it will likely affect the needs-based eligibility for Medicaid.

Medicaid eligibility often requires an individual to "spend down" his or her assets to become eligible for public assistance. These eligibility rules even pertain to insurance policies. Special arrangements, such as Supplemental Needs Trust, may help potential viators retain Medicaid eligibility.

Viators should seek tax-related advice, as they may owe federal and state income tax on the viatical settlement. Often, however, terminally ill individuals offset the additional reportable income with medical expenses that exceed the 7 percent of gross income floor.

Also, congress is considering a provision of the Senior Citizens' Equity Act that would treat proceeds from accelerated death benefits and viatical settlements as non-taxable for individuals with a two-year life expectancy. At this writing, the proposed legislation is in review by the Senate Finance Committee.

Various states are also reviewing the tax status of these transactions. California and New York exempt viatical settlements from state income tax.

Viaticating a policy can reduce estate taxes, which apply to estates exceeding $600,000. If an insurance policy is sold by way of a viatical settlement and all or part of the proceeds are given away (up to $10,000 per donee), distributed to charity or spent prior to death, the proceeds are not included in the insured's estate for federal estate purposes.

The viatical settlement company should provide a disclosure form to help people understand privacy implications. If the patient elects to viaticate the policy, the viatical settlement company's medical and underwriting staff will examines the individual's medical records through traditional insurance release.

In the case of debilitating or terminal illness, such as cancer, heart disease or Alzheimer's, the costs for hospitalization, treatment, home care and other expenses can be staggeringly large. As reported in the February 1993 issue of the Journal of the American Medical Association, cancer patients who spent time in intensive care for anything beyond post-surgical recovery went on to incur hospital costs of $82,845 to $189,339 per year.

The expenses for long-term care are also high. According to the April 1995 report of the U.S. General Accounting Office, $75.2 billion was spent on nursing home care in 1993. Of those dollars, sources such as Medicaid, Medicare, the Veterans Administration and private insurance pay about half. Patients and their families pay the rest.

Given that a seriously ill person can no longer work and usually has significant financial obligations, such situations can ravage an individual's or family's life savings. Up to two-thirds of American families would soon be financially distressed if the head of the household were to become seriously ill. It is often would-be beneficiaries who initially suggest viatication. These are usually grown children, who often want insurance proceeds used to ease family financial burdens and improve the quality of life for their loved one.
 

VIATICAL SETTLEMENT VERSUS ADB RIDERS

• An ADB is issued by a specific insurance company for only the policies it writes and often for very specific diseases, whereas most viatical settlement companies will purchase policies issued by any creditworthy life insurance company.
• The percentage available for cash payout from an ADB is substantially less than that from a viatical settlement. A recent survey of insurance companies providing accelerated benefits puts the average payout at only 25 percent to 50 percent of policy face value. The remaining face value is available as a death benefit.
• The restrictive nature of most ADBs has minimized the usefulness. ADBs generally cover a life expectancy of one year or less, while viatical settlements provide for life expectancies of up to three years and, in certain cases, even longer.
• Generally, the ADB rider can be added to an existing policy; however, it is estimated that less than 5 percent of life policies currently in force contain an ADB-type rider.

Viatical settlements also eliminate the risk of lapsed policies and lost dollars because viatical settlement companies take over responsibility to pay the annual premiums.
 

INDUSTRY REGULATIONS NOW EMERGING

Many viatical settlement companies welcome the trend, believing that responsible regulation of viatical settlements is in the best interest of visitors, their families and the viatical settlement industry.

In 1993, California became the first state to require licensing procedures for viatical settlement companies.

Under the California guidelines, viatical settlement companies provide the state's Department of Insurance with such information as past viatical settlement experience, financial status and an operating plan. The companies are also required to document how they obtain information from patients and health care providers and how they ensure the confidentiality of medical records.

At the time of this article, 13 states have legislation in place pending regarding regulation of viatical settlements. Besides California, these states include New Mexico, Kansas, New York, Vermont, Indiana, Michigan (pending), Pennsylvania, Texas and Utah. Many other states are also beginning to examine such legislation.

In December 1993, the 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 the model legislation.

The goals of the NAIC model law include ensuring that viatical settlement companies inform their prospective clients of the implications of the viatical settlement service, including the need for clear disclosure of information.
 

INTO THE MAINSTREAM