Viatical Settlements
A source of cash for clients facing life-threatening illnesses
Financial advisors are often consulted when clients have been diagnosed with life-threatening illnesses. Clients who are terminally ill expect their advisors to guide them as it relates to accessing any and all financial resources available to them. Many patients face difficult choices – especially when their financial resources are limited. Some patients are torn as to whether they should spend what money they have set aside on experimental treatment, or use their nest egg to take a dream vacation with loved ones.
According to the Foundation for Financial Planning, financial issues are the second-most frequent source of distress identified by cancer patients. Their research also found that cancer patients are three times more likely to go bankrupt. Their findings parallel data from the Consumer Bankruptcy Project which recently reports that the rate of adults 65 and older filing for bankruptcy protection has more than doubled in the past 25 years, citing increased healthcare costs as a major factor.
As a financial advisor, you will want to explore all options available to your terminally ill clients, including whether the client has a life insurance policy that could be sold in the secondary market. For terminally ill patients with less than 24 months to live, these settlements are known as “viatical settlements.”
The following FAQ provides the answers to the most common questions we receive. However, feel free to contact Asset Life Settlements at 1-855-768-9085 if you have additional questions or want to discuss a potential case.
What is a Viatical Settlement?
A viatical settlement is a financial transaction involving the selling of one’s life insurance policy in the secondary market for a cash payment. To qualify for the transaction, the policy owner (known as the “viator”) must be a terminally ill individual with less than two years life expectancy. The third party buyer becomes the new owner of the policy, pays the monthly premiums, and receives the full death benefit when the individual passes away. Viators often use the cash proceeds for a dream vacation, finance medical care, make charitable gifts, or to pay off debt.
Where Did the Term “Viatical” Originate?
The term “viatical” has its genesis in the Latin word “viaticum” which is derived from two Latin roots. The root meaning of “via” is a street or a road, and “cum” means “with” or “along with.” When combined, the literal translation is “to make a journey along with someone.”
When Did Viatical Settlements Become Popular?
Viatical settlements originated in the 1980s in conjunction with the onset of the AIDS epidemic in the U.S. During that time, AIDS victims faced an extremely short life expectancy. Many patients were in need of experimental treatment but the costs were out of reach for most. The market demand for viatical settlements was born out of the need for these patients to have access to financial resources to pay for medical treatment, finance their bucket list and generally to improve the quality of life during their final days. However, as medical advancements were made (the introduction of protease inhibitors) and longevity increased for those living with AIDS, viatical settlement transactions became less common. However, out of this period of time, the life settlement industry emerged.
What is the Difference between a Viatical Settlement and a Life Settlement?
The primary difference involves the insured’s life expectancy. In a life settlement transaction, the policy owner is typically a senior over the age of 65 with a life expectancy of less than 15 years. But as stated above, a viatical settlement is only for those who are terminally ill with less than 24 months to live.
What Other Ways Do Viatical Settlements Differ from Life Settlements?
In a viatical settlement, the proceeds from selling one’s policy are usually far greater than in a life settlement. Another differentiating factor involves the taxation of the proceeds by IRS. In terms of the federal tax laws, usually a viatical settlement is income tax free, whereas life settlements may incur federal taxes (capital gains or ordinary income) depending on the cost basis of the premiums paid. Although many states have enacted tax laws similar to the IRS’ treatment of viatical and life settlements, the tax treatment on the proceeds varies from state to state.
Are Viatical Settlements and Life Settlements Regulated?
Yes. The marketplace for life insurance settlements and viatical settlements is regulated at the state level – not at the federal level. The statutory framework for states that currently regulate viatical and life settlements is primarily based upon the Viatical Settlements Model Act. The Model Act was created by the National Association of Insurance Commissioners (NAIC), a regulatory support organization that forms a national system of state-based insurance regulation in the U. S. The mission of NAIC is to help state insurance regulators establish standards and best practices, and coordinate regulatory oversight.
According to the Life Insurance Settlement Association, 43 states and the territory of Puerto Rico currently have regulations in place, affording approximately 90% of the United States population protection under comprehensive life settlement laws and regulations. Of this group, 31 states have a statutorily mandated two-year waiting period before one can sell their life insurance policy from the time of issue, while 10 states have five-year waiting periods and one state (Minnesota) has a four-year waiting period. Most states (including states with large populations of seniors such as Florida, Maine, California, Pennsylvania, Arizona, Texas and others) have provisions within their life settlement acts where one can sell their policy before the waiting period if they meet certain criteria (i.e. owner/insured is terminally or chronically ill, divorce, retirement, physical or mental disability, etc.).
More States Are Enacting Consumer Disclosure Laws Regarding Life Settlements
Some states have enacted life settlement disclosure laws requiring that policy owners be made aware of life settlements as a possible alternative to lapse or surrender. Six states − Kentucky, Maine, New Hampshire, Oregon, Washington and Wisconsin − require some type of disclosure that informs consumers who are about to lapse or surrender a policy about the life settlement option. California and Florida require a limited-disclosure notice. Although the state of New York has not enacted consumer disclosure laws, it is noteworthy that a large percentage of the secondary market transactions processed at Asset Life Settlements originated from the state of New York.
More recently, (October 2, 2018), the Rhode Island Department of Business Regulation released its consumer-disclosure notice. A new law that takes effect January 1, 2019 requires the department to draft the notice to be posted on its website. The law also requires insurance companies to direct consumers to the state website that includes an Insurance Bulletin discussing alternatives to lapsing or surrendering policies, including life settlements. The bulletin points out that insurance companies must advise policyholders considering making changes to the status of their policies that they should consult a licensed insurance agent or financial adviser and that policy options such as accelerated death benefits, nursing home benefits, critical illness benefits and other benefits may be found on the department's website at www.dbr.ri.gov/insurance.
It is important to also note that some federal and state government agencies have begun to recommend life settlements as a solution to pay for long-term care expenses or to offset public funds used for Medicaid nursing home care.
How Common Are Viatical Settlements Compared to Life Settlements?
Today, life settlements (also known as senior life settlements) are becoming more popular as aging baby boomers and older seniors learn about the existence of the secondary market for unwanted policies. Previous estimates by LISA indicate the settlement market to be approximately 95 percent life settlements and 5 percent viatical settlements. The decline in the volume of viatical settlements started in the mid-1990s when protease inhibitors became available for AIDS patients and changed the prognosis for these patients.
Based on the transactions that we have processed over the past few years, approximately 98 percent of the cases we have brokered involve senior life settlements. The remaining two percent (viatical settlements) involves terminally ill policy owners with various medical conditions such as terminal cancer, heart failure, or liver disease. Policy owners often use the proceeds to finance vacations with loved ones, to pay off debt, or to make cash gifts to family.
Do You Have a Potential Case to Discuss?
Feel free to contact our office at 1-855-768-9085 if you have additional questions or want to discuss a potential case.