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.
The Process
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.
Senior Settlements
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.
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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. An example of such association is Viatical
Life Settlement Association of America. Their website is www.viatical.org.
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Check with the New York State Department of Insurance and the Better
Business Bureau for information on complaints filed against the each of
the companies that you are considering.