Life insurance policies are not only for protection but can also be considered a financial investment. With the advent of viatical and life settlements, insurance policies are now an avenue for emergency financial needs as well. For many years, a life insurance policy was purchased to protect families and ensure they were financially supported in the event of the insured’s expected or unexpected passing.
Viatical settlements as defined by Wikipedia, “typically is the term used for a settlement involving an insured who is terminally or chronically ill. A person generally is chronically ill if he or she is unable to perform at least two activities of daily living, such as eating, using the toilet, bathing oneself, or dressing oneself and or requires substantial supervision to protect himself or herself from threats to health and safety due to severe cognitive impairment. A person is considered terminally ill if the person has an illness or condition that can reasonably be expected to result in death within two years”. When discussing viatical settlements, it’s important to understand their legal developments and implications, their value as a financial stimulus, and what it means for end-of-life status. This is often considered a very morbid discussion, but for many, this is an essential and necessary conversation, especially in terminally ill situations.
Historically, viatical settlements have existed in the United States since 1911 as a result of the ruling in Grigsby v. Russell, 220 U.S. 149 (1911), deciding the legal basis for viatical settlements. In the opinion of the U.S. Supreme Court, Oliver Wendall Holmes delivered the opinion of the Court, “So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property. To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner’s hands” (Wikipedia.com). The Court’s decision outlined life policies as property that could be bought and sold at will. Though the decision outlined viatical and life settlements, they really did not take place until the ’80s with the onset of the AIDS epidemic.
The late 1980’s AIDS epidemic brought viatical settlements to the forefront of options for those terminally ill. As many people became infected, particularly the gay male population, many of these men died without traditional beneficiaries, leaving the death benefit to their next of kin, usually the parents who didn’t necessarily benefit from the money. “Viatical settlements oﬀered a way to extract value from the policy while the policy owner was still alive” (Wikipedia.com). The AIDS mortality rate was high, so life policies became an opportunity for a mutual benefit between investors and the terminally ill. At the time, many of the people who sold their policies used the money for treatments and living expenses as most became unable to work and had used up their savings.
Like any industry, the settlements industry did get hit with some bad press and media, causing individual states to regulate and develop legislation governing viatical and life settlements. These regulations are designed to prevent fraud against policyholders, insurance companies, and advisors. Many of the regulations developed by the states deal with disclosures, ensuring insureds and policyholders understand all aspects of their policies by educating them of their specific options. The regulations provide for policyholders to be informed that a viatical or life settlement is an option in addition to surrendering the policy for less value. Additionally, there are regulations that ensure that a policyholder is provided with all oﬀers, counter oﬀers and can obtain any tax or government assistance to clearly determine implications from the sale of their policy through a viatical or life settlement. Where there are regulations protecting policyholders, insurance companies are protected by waiting periods that are implemented by the state. For instance, there is a specified amount of time between the time of purchase and the time a life policy can be sold. This type of regulation prevents people from speculatively buying a policy just to turn around and sell it for cash. Regulations are left up to each individual state insurance department with some states having more regulatory restrictions than others.
When a policyholder is ready to sell a policy, they often hire a life settlement broker. Brokers of life or viatical settlements will gather many of the required documents including policy illustrations, medical records, and life expectancy estimates to prepare the policy for sale in the marketplace. Brokers, acting as a fiduciary to the policyholder, will conduct an auction of the policy among known buyers known as life settlement providers in an effort to get the highest offer for the policyholder. A broker must be licensed by the insurance departments as a life settlement broker in each state they represent policyholders in. A broker’s compensation may be a flat rate or a percentage of the settlement, varying from state to state and their regulations but should always be disclosed to the policyholder.
Since life policies are considered property as deemed by the Court and the sale of them regulated by the state insurance departments, viatical or life settlements can oﬀer important financial benefits to seniors over the age of 65 or those that have been diagnosed as terminally ill. In many cases of a terminal diagnosis, the ability to sell your policy through a viatical settlement oﬀers a sense of financial stability. Of course, if a terminally ill patient with a life policy has a dependent family surviving them, they should consider all options of the benefits the life policy provides while they are living. Oftentimes, policyholders are no longer able to work, have significant medical bills, and depleted savings. Selling a life policy oﬀers cash in hand, more time with family, and reduced stress. Treatments, therapies, prescriptions, and possible in-home care expenses can quickly add up. “An advantage of third-party viaticals is that you can use the payment however you want. Instead of paying future premiums to a life insurance company, sellers can use the funds from the life settlement to cover medical bills, pursue alternative treatment, get caught up on bills around the house, pay oﬀ a home, or take care of a variety of other expenses” (americanlifefund). A large sum of cash can not only ease the medical expenses, but it potentially provides the means to have more time, get friends and family together and create more memories.
Another valuable benefit of viatical settlements is that the settlement value is usually paid income tax-free. “Unfortunately, in many cases when an owner of a life insurance policy cashes out the life policy using other options, they usually face tax consequences such as paying income tax or capital gains tax on the settlement. These tax consequences cut into the proceeds and decrease the amount of money you have available to you. In contrast, with a viatical settlement, the entire settlement is tax-free, meaning you owe no additional funds to any financial institution or financial professionals”.
It is important to note, that once the insurance policy is sold to a third party, the death benefit no longer goes to the original beneficiaries of the life insurance policy. The third-party that has bought the policy will receive the death benefit. In addition, many companies that purchase these life policies also have requirements for consideration of a viatical settlement. Life settlement companies consider various factors, including the type and stage of the illness, the death benefit of the policy, and the amount of premiums. These factors determine the offer to the policyholder for the purchase of the policy. The shorter the individual’s life expectancy is, the larger the offer will be as the percentage of death benefit companies are willing to pay. The Better Business Bureau reveals, “Companies generally pay 50-85% of the face value of the policy. The oﬀer is dependent on several factors. Most important is the policyholder’s life expectancy. Other factors concern the policy itself; how large it is, the loans outstanding on it, and the credit rating of the life insurance company. Current interest rates also play a role. The company considers all of these factors when making a decision about how large a percentage to oﬀer” (bbb.org). The life or viatical settlement transaction typically takes 6-8 weeks, but sometimes can take longer depending on how quickly the policyholder’s doctors provide medical records and the insurance company provides policy information. Most of the leg work is getting the proper documentation together.
The main requirement of a viatical settlement is that the insured looking to sell their life insurance policy is chronically or terminally ill with a diagnosed life expectancy of 2 years or less. If illness is not dictating the sale of your policy, and you are over 65 years of age, then you could sell your policy through a life settlement. “A life settlement is a legal transaction where the owner of an unwanted or unneeded life insurance policy sells the policy and all of its rights for a lump sum cash payout to a licensed life settlement buyer known as a life settlement provider” (mrefinance.com). A life settlement offer can be as much as four times more than the cash surrender value of the policy. There are some distinctions between viatical and life settlements. As outlined earlier, viatical settlements benefit the terminally ill with short life expectancies regardless of age, while life settlements tend to be appropriate for seniors over the age of 65. The payouts on viatical settlements tend to be higher than life settlements because of the policyholder’s health. Life settlements are the sale of policies by individuals who are may or may not have health issues but are not considered terminal. Therefore a portion of the cash received from the sale or transfer of ownership can be taxed as income and or capital gains. The benefit of life settlements is that a policyholder can sell their unwanted, unneeded, or unaﬀordable policy for cash, and spend it however they choose. The benefit for seniors or retirees is that they will receive significantly more money than if they were to surrender the policy or let it lapse. In addition, the policyholder is no longer responsible for future premiums as the responsibility is transferred to the purchasing third party.
The decision to sell a life policy through a life settlement can be driven by many factors. The policy may have become too expensive, the beneficiary of the policyholder may have pre-deceased them, or the reason for purchasing the policy no longer exists. A life settlement could be a good alternative to a loan for any financial emergencies or simply to supplement retirement income.
There are a few simple guidelines related to life settlements and qualifying for a settlement. As mentioned earlier, there is usually a minimum age (70) to qualify for a life settlement but that can vary from one life settlement provider to another. The policyholder must have maintained the policy in good standing and have owned the policy for at least 2 years (or longer depending on the state of residence) as well as having a minimum death benefit which also can vary from investor to investor. Catherine J. Bayerly of Annuity.org explains, “the higher the face value of your policy, the more appealing it will be to potential buyers” (annuity.org). The appeal in life settlements come from the fact that “the policy owner would always be better oﬀ selling rather than lapsing and many believe the life settlement market has tremendous growth potential” (wikipedia.org). When deciding to sell your life policy for a viatical or life settlement it is important to ensure you get fair pricing. “One of the hardest things to know when you are selling a life insurance policy is whether you are getting a fair price for your policy. The best way to make sure you are getting a fair price is to shop around. This can mean directly contacting multiple life settlement companies, using a licensed life settlement broker who will shop your policy around on your behalf, or contacting your broker or other financial services provider” (finra.org). Depending on state regulations, there could be income or capital gains tax implications that could require professional tax services as well. If you are receiving government assistance programs, collection on a settlement could have negative consequences. “Cash payment from a life settlement can have unintended financial consequences, especially if your financial circumstances have changed from when you first bought the policy. For example, if you currently receive state or federal public assistance, such as Medicaid, a life settlement can negatively impact your ability to participate in that program” (finra.org).
Deciding to sell your policy through a life or viatical settlement requires careful thought and proper information to make an informed and educated decision. Whatever the circumstance, it is important to protect yourself. Finra.org recommends, “asking your state insurance commissioner whether the life settlement company or broker you are dealing with is properly licensed and whether either has a record of complaints.” Find out who is purchasing your policy and what they intend to do with it. Finra.org warns, “ask what the life settlement company that is buying your policy will do with it. Will they hold it themselves? Sell it individually? Or package it with other policies and sell interests in the package to other investors? The ultimate buyer of your policy will become responsible for paying the premiums and will collect the death benefit when you die. Any interim and ultimate buyers of your policy will also have access to a great deal of personal information about you, including your health status.” Understand that personal and medical information will be shared with purchasers and investors, and medical updates may be required after the transfer. Finra.org explains, “When you sell your life insurance policy, you will have to sign a release authorizing the release of medical and other personal information so that the buyer can determine how much to oﬀer for your policy. Once the buyer obtains that information, it may be shared with other parties, including lenders or third party investors.” Be cautious of whom is soliciting you to sell your policy. Finra.org warns, “If you are approached by someone soliciting you to sell your life insurance policy, make sure you understand that person’s role in the transaction: is he or she a life settlement broker who represents you or is the person aﬃliated with a particular life settlement company? If the answer is the latter, the person may only obtain an oﬀer from that company, making it hard for you to know whether you are being oﬀered a competitive price for your policy.”
Retirement, financial emergencies, or even a terminal diagnosis are all circumstances that warrant looking into your investments and life policies to determine whether they still hold value as a policy or should be sold as a life or viatical settlement. If health is not the driver and you are over 65, then a life settlement is going to provide an extra financial cushion or the ability to enjoy your retirement more fully. Most seniors don’t realize that their policy could be the most valuable asset they own, sometimes having more value than their homes. On the other hand, if your illness has interrupted your life, a viatical settlement may oﬀer benefits and value to you and ease the financial responsibility and stresses related to end of life. They are fairly simple transactions, but like any financial transaction, knowing the company that you are working with you and shopping around for the best settlement value will get you the most out of your life policy. MRE Finance has over 25 years of experience in the viatical and life settlement markets and can help you sell your policy. If you are interested in knowing the potential value of your policy, try the MRE Finance online free life settlement calculator which can provide you a free estimate of what your life policy could be worth in minutes or if you prefer to speak to a specialist, give them a call at 1-800-521-0770.
Remember, just because you have decided to sell or transfer your policy, there is still a period of time that you can change your mind for any reason and get your policy back in exchange for returning the money. The period of time, generally 15 days, can vary from state to state. Life settlement brokers and insurance companies must disclose all your options related to the policy you hold. Please consult tax attorneys, financial advisors and any state or federal assistance programs that you receive benefits from, as a lump sum cash settlement could change your qualifications for an assistance program. If these programs are a necessity, it may be more valuable to hold onto the life policy, but again consult a financial advisor or attorney to understand your options.