In order for the proceeds to be tax-free, the buyer generally must be a licensed or registered
viatical settlement company.
The Department explained that if any policy purchased from a New York resident is from aviator, (see New York Insurance Law [section] 7801(b)), the purchaser would have to be licensed as a
viatical settlement company and the producer of such policy would have to be licensed as a viatical settlement broker.
According to an article in the July 31, 1992 issue of The Wall Street Journal, "the first
viatical settlement company was started in 1989 by Robert Worley, Jr., an Albuquerque, NM financial planner." (14) He reportedly got the idea from "a radio talk show when a caller was complaining that his life insurance company would not buy back his policy--even at a 50% discount.
In this case, by collaterally assigning the policy, or by naming the lender as the beneficiary under the policy, they may be able to receive more than they could from a
viatical settlement company, since the death proceeds would escape income taxation.
Before that, he founded and was president of the National Capital Benefits Group of Cos., which he said was the nation's first institutionally funded and publicly held
viatical settlement company. It was funded by Transamerica Corp.
One way to defraud the investor is to sell a viatical knowing that the insured lied about his or her health condition when applying for the policy, as did one Florida viatical settlement company.(12) Sometimes, insureds acquire a policy by hiding evidence that they have a life-threatening condition.
For example, American Benefits Services, a viatical settlement company, promoted viatical investments by promising a return 42 percent greater than the amount invested, to be received on the death of the viator.
To determine the life expectancy of the viator, the
viatical settlement company has a board of physicians evaluate the person's illness, basing their findings on medical records, laboratory reports and current actuarial tables.
settlement.(3) Viatical settlements are a specialized form of receivable financing under which viatical settlement companies buy from the policyholder, at a discounted rate, the right to receive death benefits under life insurance policies.(4) The
viatical settlement company may then hold the policy, sell the policy to an individual investor, or pool the policy with others and sell fractions of the pool to investors.(5) The return to investors is the difference between the discounted value paid to the policyholder and the full value paid by the issuing insurance company upon the policyholder's death.(6)
In the first possible event, the insured irrevocably assigns his life insurance policy to a
Viatical settlement company in consideration of a payment of an accelerated death benefit by the company (not the company that issued the policy).
In addition, these new rules also apply to the sale or assignment of a terminally or chronically ill individual's life insurance policy to a qualified
viatical settlement company (one that typically purchases those policies for a percentage of face value).
In Private Letter Ruling 9443020 (July 22, 1994), the IRS was asked whether an amount paid to a terminally ill person insured by a
viatical settlement company upon the assignment of a life insurance contract was excludable from income under IRC section 101(a).
