viatical 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.

viatical settlement

The purchase of a terminally ill person's life insurance policy for a certain percentage of the policy's face value. The amount paid depends on the size of the policy and the length of time the policyholder is expected to live. The company that purchases the policy begins paying the premiums at the time of purchase and collects the death benefits when the insured dies.

Viatical settlement.

Technically speaking, a viatical settlement occurs when a life insurance policy is sold for cash to a third party before the original owner dies.

Most viatical settlements involve terminally ill people with life expectancies of less than two years who choose to sell their life insurance policies to raise money for their medical care.

In a viatical settlement, the third party pays the former policy owner an amount that is typically more than the surrender value of the policy, but less than the death benefit. When the insured person dies, the new policy owner collects the death benefit and makes a profit on the difference between the amount paid to the insured and the amount paid on the claim.

Some businesses specialize in viatical settlements, and may resell them as investments, arrangements that are regulated by the state in which the policies are sold.

Because viaticals are controversial, more complex than they seem, and have been aggressively and sometimes misleadingly marketed, both people considering selling their policies and people considering investing in them are advised to proceed with caution.

References in periodicals archive ?
Ohio 2006), for an explanation on why viatical settlements should be classified as investments.
Former beneficiaries of a contract that was sold pursuant to a viatical settlement contract brought action against the purchaser of the policy alleging that the contract was void for failure to contain certain disclosures required by Viatical Settlement Contracts Act.
Second, the provider must either be licensed to provide viatical settlements under the laws of the state in which the insured resides, or if the insured's state does not require licensing of viatical settlement providers, the provider must meet the requirements specified in the Internal Revenue Code.
In order to make their medical records available to third parties in the viatical settlement process, insureds must authorize their physicians and other health care givers, in writing, to release their private medical records.
Although viatical settlements were devised to help terminally ill viators and can be legitimate, the viatical industry has been characterized as "infected with scam artists, `ponzi' schemes, and other fraudulent activities."(6) Today individual investors and companies see significant profit opportunities in buying policies from people who are not terminally ill but who require cash and don't see any reason to continue paying their life insurance premiums.
There are two basic roles for viatical settlement companies: providers, who buy the policies themselves and hold them as the named beneficiary thereunder, and brokers, who act as intermediaries between viatical settlement providers and viators by performing underwriting functions, and negotiating a fee to be paid by the viatical settlement provider.(20)
The code provides the following safe harbors for payments received from the insurance company and from Viatical settlement companies.
Receipt of viatical settlement proceeds could disqualify the recipient's eligibility for certain means-based entitlement programs such as Medicaid or other government benefits.
As the financial success of viatical settlement investments became publicized, the secondary market for such life products grew, with companies created that specialized in accommodating investors' desires for viatical settlements.
14, the NAIC Executive Committee had reinstated the Viatical Settlement Working Group.
* Viatical settlement. The sale of a life insurance policy to a third party, wherein the seller is terminally ill and has a life expectancy of no more than two years.
Life settlements are also variously referred to as "senior settlements," "high net worth settlements," and "high net worth transactions." In contrast, the term "viatical settlement" is used to describe the sale of life insurance contract when the insured is terminally or chronically ill and expected to die within two years (see below).