By Richard A. McGrath, CIC, LIA
Imagine gambling on a person’s death.
The idea is reprehensible, yet it is the basis for a whole new industry – the viatical and life settlement industry. Many of the parties involved in this industry are engaged in unethical and even fraudulent activities, but there has been little regulation of the industry to date.
A viatical settlement involves the purchase of life insurance from insureds while they are still living, but have a terminal illness and limited life expectancy. A life settlement, or senior settlement, is the purchase of life insurance from seniors 65 and older who have a shortened life expectancy, but do not have a terminal illness.
The insured receives a lump-sum payment, while the company buying the insurance policy typically agrees to continue paying the premiums on the policy, then receives the entire benefit when the insured dies. The amount paid is based on the insured’s life expectancy and the cost of paying premiums on the policy, but it is typically about 75 percent of the death benefit.
After buying the policy, companies typically sell investments in the viatical and life settlements they purchase.
Impact of Viatical and Life Settlements
In some cases, where the insured has no other resources and has significant expenses, such as the cost of long-term care, a viatical or life settlement may be justified. However, these arrangements take advantage of people in their last days, typically leave heirs without an inheritance and negate the reason for having life insurance in the first place.
Worse still, the viatical and life settlement industry has attracted many people whose ethics are questionable at best. Most companies offering viatical settlements are not licensed and, in Massachusetts and many other states, viatical investments are not regulated.
Viatical and life settlements may have a negative impact on both the insured and the investor.
Impact on the insured
The insured who receives a cash settlement – a “viator,” in industry terms – may jeopardize eligibility for public assistance from Medicaid or other sources. Receipt of a cash settlement will also expose the individual to any creditors, and it may have an impact on insurance benefits for other family members.
Impact on the investor
Viatical settlements are typically designed with the expectation that the viator will live no longer than 24 to 36 months. Companies selling these settlements as investments often “guarantee” a specific rate of return. However, if the viator lives longer than expected, the rate of return drops – and quickly dives below the guaranteed rate.
When the viator outlives the predicted life expectancy, the company that purchased the life insurance policy sometimes stops paying premiums and makes them the responsibility of the investor. If a term life insurance policy is purchased and the viator outlives the term of the policy, the investor may be responsible for the cost of a new policy. The new policy will, of course, be more expensive, since the viator will be older than when the expired policy was issued.
In addition, most policies have a contestability clause, which allows the insurance company to contest the policy if a claim for benefits is made within two years after the policy is issued. If the insurance company is successful, it can deny benefit payments.
The policy may also be contested by family members, which could delay payment and reduce the rate of return. It is also important to keep in mind that viatical and life settlements are illiquid investments; investors do not gain access to their funds until the viator dies. Of course, the investor also assumes the risk the the insurance company that issued the life policy will go out of business before the benefit is paid out.
As mentioned earlier, fraud is also rampant in this industry. One practice, for example, is for an individual to buy several small policies on someone without revealing that the person is terminally ill, then buying the policies a short time later in a viatical settlement. If the policy amount is below a certain threshold, insurers typically will not conduct a medical exam.
Considering all of these risks, there are many other safer investments available that are likely to pay higher returns. There are also likely to be better options for the viator than giving up a life insurance policy shortly before it is likely to pay out a benefit.
If, in spite of these drawbacks, you want to sell your life insurance, or invest in a viatical or life settlement, be certain to discuss it with your insurance agent and your attorney. Also be certain to work only with a reputable company that is licensed to transact viatical and senior settlements in your state.
If you think you have been a victim of fraud or unethical treatment, contact the Massachusetts Division of Insurance at www.mass.gov/doi or its Consumer Hotline at 617-521-7794.
Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass. He can be reached at email@example.com.
This article is written for informational purposes only and should not be construed as providing legal advice.