Life settlement

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Viatical Settlement

A transaction in which a life insurance policy holder sells his/her policy to a third party. The situation occurs when the policy's fair market value exceeds the cash surrender value that the insurance company offers. The third party is known as a life settlement provider, who, in the United States, must abide by applicable state regulations. The life settlement provider becomes the policy's new beneficiary, is responsible for maintaining premiums, and upon the death of the insured person, receives the benefit. The secondary market for life insurance began growing in the last part of the 20th century. In a viatical settlement, the life settlement provider is speculating on how long the insured person will live; indeed, it is in the life settlement provider's financial interest for the insured person to die as soon as possible. A viatical settlement is also known as a life settlement.

Life settlement.

If you are over age 70 and no longer need your life insurance policy, you may be able to sell it to a third party in what's called a life settlement.

You're paid a cash amount less than the death benefit but typically greater than the surrender value, and the party that buys your policy will get the death benefit when you die.

Similar to viatical settlements, in which terminally ill people may sell their life insurance policies, generally to use the cash to pay for healthcare, life settlements let you forgo a death benefit and use the cash in your policy while you're alive.

However, life settlements are for people who are healthy and expect to live more than a couple of years. Specific rules for life settlements are set by the state where a specific transaction takes place.

Some businesses specialize in buying life insurance policies from older or terminally ill individuals and reselling them as investments.

However, because these insurance arrangements are controversial and most investors understand them poorly, both people considering selling policies and people considering investing in them are advised to proceed with caution. For example, there may be complex estate-planning and tax consequences to life settlements.

References in periodicals archive ?
There's been gold in the hills for a long time," he said at the fall 2005 conference of the Viatical and Life Settlement Association of America.
The Arkansas Securities Department is now regulating viatical contracts because of a rash of abuse in the industry.
Lisa Karam Middleton, Death Watch: Viaticals Under Fire, available at http://www.
The major risk with "investing" in viaticals or purchasing a fractional interest in a viatical trust agreement is that the insurance policy may not exist.
Viaticals were particularly appropriate for People With AIDS (PWAs) because they had a life-limiting illness, which, at the time, had a very predictable term.
147) See Herron, supra note 23, at 936 (concluding that those states that currently regulate viaticals should adopt mandated minimums, and those states that do not yet regulate viaticals would be well-served to adopt regulation with the mandated minimums).
Viaticals collect money from investors - including big banks and financial houses - and use it to pay terminally ill people a percentage of the value of their life insurance policies.
The life settlement market is an outgrowth of the viatical settlement market in which policies of the terminally ill are bought and sold.
These new jumbo viaticals, sometimes called "high net worth transactions" or "senior settlements," are touted as a form of estate planning to healthy older individuals who may willingly sacrifice a death benefit which is no longer needed to bear an estate tax burden, or who do not want to continue tying up their cash in high insurance premiums.
Viaticals are not a stock market product and offer fixed, total returns of up to 42% based upon estimated life expectancies of up to three years.