A viatical settlement allows you to invest in another person's life insurance policy. With a viatical settlement, you purchase the policy (or part of it) at a price that is less than the death benefit of the policy. When the seller dies, you collect the death benefit.
Your return depends upon the seller's life expectancy and the actual date he or she dies. If the seller dies before the estimated life expectancy, you may receive a higher return. But if the seller lives longer than expected, your return will be lower. You can even lose part of your principal investment if the person lives long enough so that you have to pay additional premiums to maintain the policy.
There are some basic rules of investing that you should keep in mind before investing in a viatical settlement:
- Determine if this type of investment is suitable for you, taking into account your age, current financial status, and other personal circumstances. As a potential investor, you must realize that the life-expectancy information only involves a medical estimate for how long the viator may live. If the viator lives longer than expected, your investment dollars may be tied up for a longer period of time, and you may be paying the premiums for the policy during this time.
- Check with the Washington State Department of Financial Institutions (DFI) to find out if the viatical investments being offered to you are considered to be securities. If so, registration and antifraud provisions of the securities laws may apply. Other potential sources of information about companies and individuals who have been charged with fraud, other law violations or consumer complaints include the Federal Trade Commission, the Securities and Exchange Commission, the Office of the Attorney General, the state Office of the Insurance Commissioner, and the Better Business Bureau.
- Do your own research regarding the success of new treatment options or drug advancements for the illness suffered by the viator.
- Determine who holds the responsibility to pay policy premiums, and for how long. A lapsed policy means that you could lose your entire investment.
- Determine whether the physician who issued the life-expectancy estimate actually examined the viator.
- Determine whether the viatical settlement includes any provision for the investor to receive annual statements to track the health and whereabouts of the viator. Inquire whether this service involves an extra charge.
- Determine whether the settlement provides for an early return of all or part of your investment dollars in case of an emergency. If so, at what cost?
- Determine what control, if any, will you retain over your investment?
- Determine who holds the responsibility to obtain a certified death certificate and notify the insurance company when the viator dies. Will this require an extra fee?
- Determine what financial information or written statements will the provider disclose about its history, solvency, litigation and reliability. You should be aware that if the viatical settlement provider and/or the insurance company goes bankrupt, you could you lose or tie up your investment dollars indefinitely.
- Choose only policies that are issued by insurance companies with at least an "A" rating according to rating services such as Best, Standard and Poor's, and Moody's.
- Beware of life insurance policies that are within the contestability period.
- Beware of policies that may have been issued fraudulently.
- Be certain you (and co-owners, if applicable) are listed as owners.
- Be certain you (and co-owners, if applicable) are listed as irrevocable beneficiary.
Common Misrepresentations and Omissions
As a prospective investor, you are entitled to a full disclosure of all material facts regarding the investment. Therefore, you should be aware of common misrepresentations and omissions made by sales agents when they solicit prospective investors.
- Rate of return
Example: "50% guaranteed return"
This refers to the lump sum that you'll receive when the insured eventually dies, assuming nothing goes wrong. But it doesn't tell you the annual return which depends on the accurate estimate of the insured's life expectancy and the timing of his/her demise. An "annual return" can never be guaranteed.
Example: "Zero risk to principal"
There are several risks that may not disclosed by the sales agent. First, there is the risk that you could lose or tie up your investment dollars indefinitely if the viatical settlement company and/or the insurance company becomes insolvent. Second, the policy may lapse if the premiums are not paid. Third, if the policy is a term life you may lose your investment if the insured outlives the term of the policy. Fourth, if the policy is within the two-year contestability period and the insured dies, the insurance company may deny payment of the death benefits. Fifth, if the insured commits suicide the insurance company will deny payment of death benefits.
- Financial statements
Sales agents sometimes fail to disclose the financial statements of the viatical settlement providers. However, this information is material and helpful in determining the provider's solvency.
- Pending litigation and/or regulatory action
If applicable, this information should be disclosed because any event that may affect the provider's solvency or ability to do business is material.
Sales agents almost always receive compensation for their sales efforts. Under state securities laws, as a prospective investor, you are entitled to know what portion of your investment goes towards commissions and other selling costs.
Some sales agents may not disclose whose responsibility it is to pay the premiums on the policy. In most cases, a percentage of your investment is set aside in a premium reserve account and an escrow company pays the premiums using the account. You should determine who has the responsibility to pay the premiums if the original premium reserve account becomes depleted.
Sales agents sometimes do not disclose who has the responsibility of tracking the health status of the insured, obtaining a death certificate upon the insured's demise, and filing a death benefits claim with the insurance company.
It is important to weigh the relative risks of different investments before making the investment decision that is most appropriate for you. Some investors have cashed in relatively safe, but low paying annuities, only to find the high paying viatical investment that they purchased was in fact too good to be true. They then have faced the possibility of losing their entire investment. In some cases, investors have compounded this problem due to the fact that they had to pay a penalty for cashing in an annuity early and pay income taxes on a portion of the distribution. While investing in viatical settlements can be a profitable venture, make sure that you have done all that you can to ensure that you understand the viatical investment product and the risks associated with it.
Beneficiary: The person designated to receive the face value of a life insurance policy. In a viatical settlement, one or more investors may receive this designation on an "irrevocable" basis which means no one can change it without permission.
Viaticate: The process in which a person sells a life insurance policy to a third party for less than its face value in exchange for the ownership and beneficiary rights upon the death of the insured.
Viatical Settlement: The sale of a life insurance policy by the owner to a viatical settlement provider in return for immediate payment of a percentage of the policy's face value.
Viatical Settlement Contract: A written agreement between a viatical settlement provider and a viator which establishes terms under which the provider will pay the viator and the cancellation rights of the viator.
Viatical Settlement Provider: A company that enters into multiple viatical settlement contracts with viators. The provider arranges such settlements between viators and one or more investors.
Viatical Settlement Broker: A person or firm offering or attempting to negotiate a viatical settlement between a viator and a viatical settlement provider.
Viator: The owner of a life insurance policy who enters into an agreement to sell the ownership and beneficiary rights of the policy to a third party for less than its face value.