Buying An Interest In A Life Insurance Policy: Understanding The Risks And The Potential For Fraud In Viatical Settlements


Viatical Settlement

InvestmentsIndividuals with life-threatening illnesses may be able to sell their life insurance policies for a percentage of the death benefit of the policy. If you’re interested in buying or investing in one of these policies, you should carefully consider the benefits and risks involved.

Becoming a participant through an investment in a viatical settlement may or may not be the right choice for you. The information that follows is intended to inform you about viatical settlements from the standpoint of a participant in the purchase of a viatical settlement contract.

Viatical settlement investments have been used as a device to defraud investors. States have recently passed legislation prohibiting viaticals from using advertising, which exaggerates the safety and profitability of viatical investments, after receiving complaints that companies were misrepresenting the real time required to obtain payments. States have also brought actions against unethical viatical companies. Instances of viatical settlement sales involving "wet ink" and "clean sheeting" schemes have occurred. A wet ink scheme involves the solicitation of healthy people to apply for insurance by viatical sellers. Once the policy is issued it is immediately sold to investors using misleading medical information. Clean sheeting involves the viatical seller soliciting people that actually are terminally ill to apply for insurance, either in amounts just below the limits for a medical exam, or by using the medical records of a healthy person. Clean sheeting attempts to defraud the insurance company, which may deny payment on the policy.

Connecticut has acted to regulate viatical settlements under  Connecticut General Statutes, Section 38a-465, et.seq. Viatical settlement providers and brokers must be licensed and the Insurance Commissioner must approve the contracts and forms used. The Connecticut Insurance Department, along with the National Association of Insurance Commissioners, is concerned that consumers may not fully understand viatical settlements. The following information is provided as general information. Consumers are urged to contact the Connecticut Insurance Department for more specific information.

Terms

A viatical settlement is the sale of a life insurance policy to a third party. The owner (viator) of the life insurance policy sells the policy for a reduced amount or a percentage of the contracted death benefit. The buyer or viatical settlement provider, becomes the new owner and/or beneficiary of the life insurance policy, pays all future premiums, and collects the death benefit of the policy when the insured dies. A participant in a viatical settlement invests in the viatical settlement contract obtained by the viatical settlement provider.

A viatical settlement provider is the person or company that buys the life insurance policy from the viator.

A viatical settlement contract is the contract or agreement in which the viatical settlement provider agrees to buy all or part of a life insurance policy.

A participant is an investor in the financing transaction in which financing is obtained for the purchase, acquisition, transfer or assignment of viatical settlement contacts.

Know Your Options

If you’re thinking of participating in a viatical settlement you should:

  • Understand clearly all the details of the risks involved before deciding to purchase.
  • Consult an independent professional financial advisor who has an understanding of your personal financial circumstances, investment objectives, age and other considerations.
  • Ask your tax advisor about any possible tax consequences of buying a viatical settlement. Determine if your retirement plan, e.g., 401k, IRA, Keogh, allows the use of plan funds to buy a viatical settlement.
  • Check with the Connecticut Insurance Department about the licensing status of the viatical settlement provider you are speaking with. Under Connecticut law viatical settlement providers must be licensed.
  • Important Considerations

    • Typically, viatical settlements are offered to buyers at a discount from the death benefit. The discount is for the entire life of the policy and is not an annual rate of return. An annual rate of return can’t be guaranteed because the payment of the death benefit depends on when the insured dies and no one can perfectly predict a person’s life expectancy.
    • A viatical settlement shouldn’t be considered a liquid investment because no return on the investment is received until the death benefit is paid and your interest in the viatical settlement is not readily marketable.
    • Viatical settlements based upon group insurance policies may be subject to the possibility that the group policy is terminated. In this case the termination will trigger the need to convert the group coverage to an individual policy. You should ask if there are any limits or caps in the conversion rights, and who will be responsible for payment of any additional premiums once a group policy is converted.
    • Insurance companies may contest death claims for policies that haven’t been in effect for at least two (2) years at the date of death.
    • The death benefit could be denied on various grounds within this contestibility period. For example, if the insured commits suicide within two (2) years of the policy’s effective date, the insurance company may not pay the death benefit.
    • You should understand how the life expectancy of the insured is estimated.
    It could be in-house staff, independent physicians or a consultant firm that analyzes the medical and actuarial data. The estimated life expectancy is based on the medical information provided by the insured’s physician or hospital. It’s important to note that developments in medical treatments or unexpected changes in the insured’s medical condition could affect the accuracy of the estimated life expectancy.
    • It is important to know who will be responsible for future premium payments after the buyer invests in the policy.
    Ask how these payments are guaranteed. If the premiums are prepaid in escrow for a certain period, know who will pay the premiums if the insured lives beyond the estimated life expectancy. In some cases, you may be liable, as the buyer of the viatical settlement, for premium payments to prevent the policy from lapsing.
    • Ask what trust fees, commissions or other expenses you are required to pay.
    • Determine who will be responsible for monitoring the status of the insured and of the insurance policy.

    This information is provided in cooperation with the:

    National Association of Insurance Commissioners
    120 W. 12th Street, Suite 1100
    Kansas City Mo. 64105
    (816) 842-3600

    http://www.naic.org