Of all the assets you may own, one of the most valuable and most often overlooked is life insurance. Your insurance policy may be worth hundreds of thousands, if not millions, of dollars, which is money you or your family might be able to use more effectively if you had it to spend. A viatical life settlement allows you to collect much of that value now. With life insurance viatical settlements, you can leverage one of your most valuable assets and put the money to use while you are still alive.
If you seek financial success for yourself or your family, the first and most important step is to understand all the options you have for building wealth. Many individuals fail to fulfill their financial potential because they do not recognize the value of assets they own. The better you are at recognizing and leveraging all your property, the easier it is to increase your net worth and maintain it over the long haul.
- Settlement Summary
- Historical Highlights
- Taking Stock Of The Trends
- Examining Eligibility
- The Fine Print In Focus
- A Look At The Law
- New York
- Broker Basics
Viatical settlements involve selling your life insurance policy to a third party. Most parties will pay between half and 80 percent of the full value of the policy. This is four times higher than the average insurance policy’s cash surrender value, or the value the insurance company will pay if you return the policy. The buyer, or provider, will then assume responsibility for paying all your life insurance premiums, but when you die, they will be able to collect the policy’s full value.
Compared to other methods for selling life insurance, viatical settlements are unique in that the original policyholder must be suffering from either a terminal illness or a chronic disease. This increases the likelihood they will die shortly after the sale, thus making the venture more profitable for the person who buys it. As a result, buyers may be willing to offer you more in a viatical settlement than when buying your life insurance policy under other conditions.
Settling your life insurance policy can be a valuable investment if you no longer support many family members financially but could use an influx of money in the present. Given you must have a terminal or chronic illness, you could use the money to pay for your care. Alternatively, you could invest the money in other ventures that might have a higher return for your or your family than life insurance. Remember the value of life insurance declines over time due to inflation, but you generally must pay premiums for as long as you have it. Trading in life insurance for a lump sum payment is therefore often the best strategy if you expect to live for a long time.
A viatical settlement provider is usually not a sole individual. Instead, groups of investors will come together to purchase your life insurance policy and will then share its benefits equally when you die. They will not have to pay federal income taxes on these benefits, any more than your family would if you kept the policy for yourself.
The history of viatical settlements is closely tied to that of life insurance, which has existed within the United States since the early 19th century. As with most assets, Americans had long attempted to sell insurance policies, but the validity of these sales was not established until the 1911 Supreme Court case Grigsby v. Russell. In this case, a man named John C. Burchard had sold his life insurance policy to his physician, Dr. A.H. Grigsby. Dr. Grigsby agreed to take over the premiums and pay Burchard $100, which Burchard then used to cover his medical care. A year later, Burchard died, and Grigsby attempted to collect the value of the policy. Burchard’s executor R.L. Russell, however, argued the policy’s value should instead go to the Burchard estate.
The dispute between Russell and Dr. Grigsby went all the way to the Supreme Court, which ruled in the doctor’s favor. Writing for the majority, Justice Oliver Wendell Holmes, Jr. argued the value of life insurance policies depended on their ability to be transferred just as any other asset could be. The owner had the right to sell a policy, and thus the settlement provider had a right to accept it and reap its benefits. This set the legal foundation for viatical settlements and other arrangements to sell insurance policies.
While Grigsby v. Russell established the legal permissibility of viatical settlements, the practice did not develop into an industry until the HIV epidemic of the 1980s. At this time, those who developed AIDS had very short life expectancies, and the few treatments available were highly expensive. Those who owned life insurance policies found selling them was an effective way to raise money for treatment, and providers would pay top dollar given how soon they could expect to cash in the policies. Viatical settlement companies thus arose to take advantage of this tragic but lucrative trend, providing AIDS patients with the money for much-needed care.
As viatical settlements have expanded in popularity, federal and state governments have taken steps to make them safer and more widely available. Chief among these efforts was the Health Insurance Portability and Accountability Act of 1996, or HIPAA, which explicitly protected the right of insurance policyholders to transfer their policies to third parties. As government recognition and protection has increased, viatical settlements have become safer investments, encouraging more people to take advantage of them.
Taking Stock of Trends
Like most financial instruments, viaticals and other life insurance settlements were hard hit by the global financial crisis of 2008. Due to the general collapse of financial resources following the crisis, fewer investors had the money to buy viatical settlements. Meanwhile, state governments began to enact new financial regulations, many of which made it more difficult to buy and sell insurance policies. As a result, the viatical settlements industry did not grow as rapidly as it otherwise would have, though it did not face the same devastation as other financial practices did.
While the financial crisis was bad news for those looking to sell their insurance policies in the short run, it has led to new opportunities today, as investors recover their money and begin buying policies again. Investment giant Berkshire Hathaway bought $300 million in insurance policies in 2013, and other firms quickly followed suit. By 2014, there were $3 billion per year in viatical and other life insurance settlements, with a projected $180 billion market for similar transactions over the following decade. This means if you qualify for a viatical settlement, now is a great time to buy one, as growing numbers of investors are competing for your assets.
The growth in potential viatical settlement providers is to some extent mitigated by the increasing number of Americans with chronic illnesses. As the U.S. population ages and more people develop diseases like diabetes and obesity, the number eligible for settlements is increasing. Many of these individuals also need money to pay for their care, making viatical settlements a more attractive option. This could end up putting downward pressure on the price you will get in a settlement, as you will have to compete with a larger number of sellers. Nonetheless, most Americans who qualify for viatical settlements do not take advantage of them or even know they are an option. If you sell now, demand is still likely to outstrip supply.
Finally, viatical settlements are likely to be transformed by new developments in how life insurance policies are sold. Of particular note is a recent effort to create an exchange for viatical and other life insurance settlements. Known as Ovid, this exchange will allow potential buyers and sellers to find each other more easily and at a lower cost. It should also improve transparency and communication, so both parties can trust each other and come to an agreement to accommodate each of their needs. Developments like this should make viatical settlements more widespread, more reliable, and more lucrative on all sides.
As lucrative as viatical settlements are, not everyone can take advantage of them. Such settlements have some strict eligibility requirements to keep both buyers and sellers safe. These include:
- Policy Value—You can only receive a viatical settlement if the total value of your life insurance policy exceeds $50,000.
- Policy Age—You must have held your life insurance policy for more than the minimum amount of time specified in your state. Most states require you to hold it for two years, but some set the minimum as high as five years.
- Health Status—To qualify for a viatical settlement, you must have been diagnosed with either a terminal disease or a chronic medical condition. Typically, your life expectancy cannot exceed two years. You may need to take a health exam to confirm this before completing the settlement.
Even if you do not qualify for a viatical settlement specifically, you may still be able to sell your life insurance policy using a different kind of settlement. Depending on the reasons you do not qualify, however, other settlements may not provide as high a payoff as viaticals do. It is thus essential to determine whether you qualify for viatical settlements, as they may be your most promising option if you are committed to selling your policy.
The Fine Print in Focus
While viatical settlements are among the most promising ways to sell your insurance policy, selling may not be the best option for extracting the policy’s value. It is important to read the fine print of your policy and consider other ways you can turn it into spendable cash. Depending on your insurer, you may be able to take advantage of accelerated death benefits.
Accelerated death benefits are payouts policyholders can claim if they contract very serious illnesses. The value of these benefits may be as high as 75 percent of what the policy would pay out upon your death. The value not paid as an accelerated death benefit remains as a life insurance benefit, allowing your beneficiaries to still claim it when you die. As with viatical settlements, however, most insurance companies set strict eligibility requirements for these benefits. Typically, you must be able to prove you have a catastrophic illness and your life expectancy is no longer than four years.
If you qualify for both an accelerated death benefit and a viatical settlement, you may be able to claim both. Say your insurer provides a 50 percent accelerated benefit. You can claim this benefit, then sell the remaining 50 percent as a viatical settlement. Depending on the percentage payment the provider offers you, this may be much more lucrative than simply viaticating the entire policy.
When considering accelerated death benefits, be sure to read the details of this policy, as they can make a big difference to how much money you earn. The size of the benefit, for example, often varies based on how sick you are. Many insurance companies offer 100 percent of the policy’s value as an accelerated death benefit if you expect to die within 6 months but only 50 percent if you expect to live another year. Insurance companies also frequently charge administrative fees on these benefits, which may be either lump sums or percentages of the payout. All these factors affect the profitability of an accelerated death benefit compared to that of a viatical settlement.
In addition to death benefits and settlements, you should also consider:
- Borrowing Against the Policy—Besides claiming an accelerated death benefit, you may also have the option of borrowing money with the insurance policy as collateral. This is often the best solution if you need only a small fraction of the value of your policy. Borrowing against an asset also minimizes the amount of interest you will have to pay on the loans.
- Selling to Your Heirs—While not technically an alternative to viaticating, it may be worth your while to get a viatical settlement from your heir rather than from an outside party. Consider that investors are only willing to buy viaticals because they expect to profit off of them, often by as much as 25 percent of what they paid. By selling to an heir, you can still get the full benefit of a viatical settlement while allowing the person who would have benefited from your life insurance policy to keep those profits.
As with death benefits, be sure to check the fine print from your insurer before taking one of these steps. The better you understand the nuances of your life insurance policy, the easier it is to weigh all your options for reclaiming its value.
A Look at the Law
While selling life insurance has been permissible ever since Grigsby v. Russell, specific viatical settlement legal policies vary from state to state. Most states regulate viatical settlements under the same laws that apply to all other life insurance settlements, though a few, including Delaware, Michigan, and New Mexico, regulate them separately. The states that regulate them together include:
- Florida—A viatical settlement Florida cannot be made less than two years after you buy an insurance policy. The Sunshine State also requires viatical settlement providers to inform consumers of all the risks they face.
- New York—Like Florida, the Empire State specifies a waiting period of two years before you can get a viatical settlement. The state sets strict licensing requirements for viatical settlement providers under the New York Life Settlements Act.
- Illinois—Under the Viatical Settlements Act of 2009, Illinois sets strict rules for viatical settlement broker training, as well as for licensing viatical settlement providers. For policyholders, it sets the waiting period at two years.
- Texas—The Lone Star State requires all viatical settlement providers and brokers to undergo state registration. They also set a two-year waiting period for policyholders.
- California—Like most other states, California requires you to have a life insurance policy for two years before you can get a viatical settlement. The California Insurance Code prevents anyone from soliciting, entering, or brokering viatical settlements without a state license.
The only states that do not regulate viatical settlements are Missouri, South Dakota, Wyoming, Alabama, and South Carolina. All other states, as well as Puerto Rico, have some laws or statutes on the subject; it pays to research those regulations before attempting to sell your insurance policy.
If you decide to seek a viatical settlement, it’s important not to do so alone. Depending on what state you live in, you may be legally required to have a licensed broker take part in the agreement. Even when they are not legally required, brokers are invaluable for connecting you with and vetting potential providers. A broker can also help you keep track of the paperwork involved in the agreement, as well as ensuring you are obeying all applicable regulations.
When choosing a viatical settlement broker, look for someone who is fully licensed and transparent about their fees and policies. Find someone who offers competitive bidding, meaning they bring together many potential providers to vie for your policy. The broker should also assure you they will keep all your medical and financial information private. In addition, your broker should have errors and omissions insurance coverage, which will compensate you if they make a costly mistake. Finally, the best viatical settlement brokers keep medical professionals on their staff, as assessing the state of your health is necessary to be sure selling your insurance policy is a good investment.
A viatical settlement can be a valuable financial venture, but like any investment, you have to be sure it is right for you. You must compare settlements to all the different available options to make use of your assets and consider potential brokers and providers who will work with you honestly and effectively. The more you learn about viatical settlements, the easier it will be to make the best financial decision for yourself and your loved ones.