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ViaticalA Viatical settlement is the sale of a life insurance policy by the Insurance contract|policy owner, before the policy matures. Such a sale, at a price discounted from the face amount of the policy but usually in excess of the premiums paid or current cash surrender value, provides the seller an immediate cash settlement. Generally, viatical settlements involve insured individuals with a life expectancy of less than two years. Some people are also familiar with life settlements, which are similar transactions but involve insureds with longer life expectancies (two to twelve years).A viatical settlement can be an innovative wealth and estate planning tool under the right circumstances. It also essentially creates an open market for redemption of a policy. For example, if the only place you could sell your Ford Motor Company stock was to Ford you would not get that much for it. The same applies to the value of an insurance policy. As long as life insurance has been aro! und, the only place to redeem your policy was from the issuer. Now, much to the chagrin of the life insurance industry, there is an open market to determine a policy's value. From the perspective of the investor, purchasing a viatical settlement is similar to buying a bond with a negative coupon and an uncertain redeption date. The return depends on the seller's life expectancy and when he or she dies.Viatical settlements grew in popularity in the United States in the late 1980s, when the AIDS epidemic first hit. The early victims of AIDS in the U.S. were largely gay men, many of whom were not particularly old. They often had no wives or children (the traditional dependents in a life insurance policy), but they had life insurance policies through employment or due to other investment activity. The dependents on the policies were often their parents who did not need the money. Viatical settlements offered a way to extract value from the policy while the policyholder was! still alive.At the time, the AIDS mortality rate was very hig! h, and l ife expectancy after diagnosis was typically short. Investors were reasonably sure that they would collect in a relatively short time. This combination of events caused a surge in viatical settlements as both investors and viators saw an opportunity for mutual benefit.Viatical settlements eventually developed a bad reputation in the investing community. The companies that purchased them from policy holders typically resold them to individual investors. Salesmen were paid large commissions to push the settlements, which were not conventional investments and which were misunderstood by many investors. The government regulatory agencies had little experience and few regulations dealing with viatical settlements, and the industry attracted some unscrupulous dealers.Despite the bad experience of some investors, viatical settlements remain an often valuable tool for the personal financial management of many ill people. A 2002 study showed that among hospice financial counsel! ors who have had experience with viatical settlements, most report positive experiences. |
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