A viatical settlement is a transaction that takes place when a company pays a person who is terminally ill a percentage of the face value of that individual's life insurance policy. The company then becomes the beneficiary of the policy. The law allows this transaction to occur since a life insurance policy is considered to be the personal property of the insured. As with any type of personal property, it can be freely transferred, assigned, or sold by the owner to another person.
Generally, the shorter the individual’s life expectancy is, the larger the percentage of its value of the policy the companies are willing to pay. In effect, the company is speculating on the policyholder's approaching death. What may seem morbid to some, however, can be very helpful to others. It permits policyholders to obtain some financial benefit from a life insurance policy while they are still living, and thus improve their quality of life or medical care.
Throughout history, life insurance policies have been bought and sold. However, viatical settlement companies did not start to appear until the late 1980's. They were created chiefly in response to the demand created by the AIDS crisis. Currently there are many companies nationwide dealing in viatical settlements. Many of these companies are reputable; some are not. Because of the rapid growth of the industry, it is being regulated in several states, and others are considering regulation. New York is among those states that have enacted legislation that regulates viatical settlement companies. This report will describe the process of viaticating a policy, New York state law concerning viatical settlement companies, and a few of the issues to consider before entering into a viatical settlement.
When you contact a viatical settlement company, it will provide you with an application. That application will ask for your medical records, your physician's assessment of your condition and your permission for the release of your insurance information. The viatical settlement company will review that information and make an offer for a certain percentage of the policy.
Companies generally pay 50-85% of the face value of the policy. The offer is dependent on several factors. Most important is the policyholder's life expectancy. Other factors concern the policy itself--how large it is, the loans outstanding on it, and the credit rating of the life insurance company. Current interest rates also play a role. The company considers all of these factors when making a decision about how large a percentage to offer.
New York State Law
To operate legally in New York State, viatical settlement companies must have a license with the New York State Department of Insurance. This law has been enacted only recently. Previously, they only needed to have applied for such a license. Now, however, it is mandatory that they actually have obtained such license before they begin practicing. NY Statutes §7802(a). This issuance of this license is contingent upon a thorough investigation by the state to ensure the company is competent, trustworthy, and intends to act in good faith. Upon subsequent examinations, the state has the right to revoke or refuse to reissue the license if the company has fallen beneath acceptable standards.
The license process also includes examination of the company's financial records and procedures. Each year the company must file financial statement with the Superintendent of the Department of Insurance. The firm's contract must also be in writing and be approved by the state.
New York law mandates that no company may enter into an agreement with a consumer for a viatical settlement until these steps have been followed. Additionally, the following rules also apply to all viatical settlements in the State of New York:
- The consumer has the right to cancel the agreement within 15 days.
- The funds from the purchase of a policy must be transferred to a state-approved escrow account while the transaction is being completed.
- Generally, payment for a policy cannot be made in installments unless the company is licensed to act as an insurance company or bank by the state.
- The medical information obtained by the viatical settlement company must be kept confidential.
- A physician, attorney, or accountant may not be paid a finder's fee or commission by the viatical settlement company.
- The application for a settlement must contain a statement explaining how a settlement might affect state aid programs and taxable income.
- When an application is received by the company, the company must give the applicant for a settlement an information booklet. The booklet describes viatical settlements, possible alternatives to them, the financial consequences of a settlement (i.e. its impact on medical and/or public assistance and the possible tax consequences), and the right to cancel. The company must also provide the name of any person who is going to benefit from the sale of the policy.
- The company may not discriminate on any basis, including if the viator currently has dependents.
A senior settlement is a relatively new type of settlement. It is like a viatical settlement in that it also involves the transfer of ownership of a life insurance policy in exchange for a percentage of its cash value. Unlike a viatical settlement, however, you do not have to be terminally ill. In many cases you must only be over 65 years of age. Keep in mind however, that the longer your life expectancy the less percentage you will most likely be paid for your policy.
Points to Consider
- Get expert financial advice. As the companies are required to disclose, individuals with chronic or life-threatening illnesses may be able to receive viatical settlement proceeds free of any Federal income tax. Receiving money from a viatical settlement company may also affect government benefits. Seek advice from an accountant, financial planner, or attorney. Some companies provide a financial planner for you, but you'll probably want to use one of your own choosing.
- See if you can receive benefits from your existing policy. More and more companies offer "accelerated" benefits on their policies. This option is limited by New York State law to individuals with a life expectancy of 12-24 months or less, and some policies limit it further. Unlike some viatical settlement companies, insurance companies will generally let you accelerate only a portion of your policy, leaving part of it for your beneficiaries. However, by the same token, some companies will not permit you to accelerate the whole policy. The company is not required to offer accelerated benefits for your entire policy. The portion of the policy that can be accelerated is often "discounted." The discount is based on generally accepted interest rate formulas specified by law. Usually the discount rate would fall between 5 and 15%. Sometimes non-discounted or "full" benefits are available. So, if you held a policy where the death benefit was $100,000, you could decide to accelerate 50%. If the discount rate is 10%, you would be paid 90% of $50,000, or $45,000. The remaining $50,000 on the policy would be a death benefit for your beneficiaries. Keep in mind that if you want the insurance company to pay any beneficiaries the remaining death benefit upon your death you must continue to pay the insurance premiums. If an accelerated death benefit is not available through your life insurance, the next step would be to look into viatical settlement or senior settlement companies.
- Check if the company you are dealing with is a broker or a funding company. A funding company actually buys your policy. A broker seeks a buyer for your policy. That buyer could be a funding company or an individual investor. Do not assume that a broker is acting in your best interest. Brokers seeking funding companies may steer you towards a company they have a relationship with, not the one that would give you the best deal. These brokers usually receive a percentage of the death benefit from the viatical settlement company that purchases the policy. If a broker is seeking an individual investor, realize that the broker may shop the policy to many individuals. You will want to consider if you want private individuals examining your medical records and having an interest in your life expectancy. Keep in mind that the eventual buyer of your policy must have a license from the New York State Department of State. There are currently no individuals that can legally purchase policies in New York State.
- Do not accept an offer that gives a partial payment or installments. All funds from the sale of a policy must be received at the time of the sale, or the sale violates New York State law. The only exception to this is if the company is licensed to act as an insurance company or a bank by the state. Also make sure that the offer you receive is "net" of all expenses, which means there are no hidden fees that will affect the final sale price.
- Ensure that the money from a sale goes into an escrow account until the transaction is completed.
- If you have a group life policy at your workplace, and you plan to leave your job, do not let the policy expire. Many group policies let employees change to an individual policy within a month of departure. While Federal law requires that companies inform employees of the privilege of continuing the policy for health insurance, there is no such requirement for life insurance. Your life insurance could expire without your knowledge, and you will be left with no policy.
- Get at least three offers for your policy.
- There are many viatical associations with member companies. Several of these associations offer informative websites and a listing of their member companies. Examples of such association are LISA, Viatical Web, NAIC, and FINRA.
- Check with the New York State Department of Financial Services and the Better Business Bureau for information on complaints filed against the each of the companies that you are considering.