Viatical Settlements

OK, I give up. What is a viatical settlement?

In a viatical settlement, a terminally ill person sells his or her life insurance policy to a third party for a lump-sum payment. In return, the third party, who may be an individual investor or a special firm, takes over the payments on the policy and is the beneficiary of the policy upon the death of the patient. To put it bluntly, the buyer is betting on your demise, and you get to enjoy your money or pay down your debt with the cash. A close friend of mine got a viatical settlement and went to Europe with her husband for two months while she was in remission from her ovarian cancer.

That seems easy. How does the process work?

The process of arranging a viatical settlement can be quite confusing, as can the payment terms. The first thing to know is that viatical settlements vary greatly depending on whom you are settling with, your state (or the policy’s state), and the terms of your individual policy.

The viatical industry is regulated on the state level, but it is not regulated at all in many states. Although the National Association of Insurance Commissioners has proposed legislation that would change this, there are currently no uniform national standards. This means that there is no single federal regulation that governs these settlements. If you are interested in being party to a viatical settlement, you can start with the state insurance commissioner’s office or check with your State Health Insurance Assistance Program (SHIP) office.

Despite the fact that there are no national standards, all viatical settlements have some similarities. Here’s what they are:

• The viator is the person selling the life insurance policy. The viator has been diagnosed with a probable terminal disease and expects to die relatively soon, usually within 24 months.
  
• There must be supporting medical documentation. This includes documentation of your disease, of the prognosis, and of the policy and payments into it.
  
• There is usually a broker involved in the transaction. The broker finds an investor to buy the policy. The broker may negotiate the deal, but while optimal, this is certainly optional. Unfortunately, as in all things in life, there are some disreputable brokers. Get references if you put the whole deal in their hands.
  
• In addition to the viator and the broker, there is also the investor, who buys the policy. The investor is usually a viatical settlement company, which may then sell the policy to an individual investor or keep the policy as an institutional investment.
  
• Once the investing firm or group is chosen, the broker and investor negotiate terms and details of the settlement. An actuarial account of the patient’s diagnosis is compared with the eventual value of the policy, and a cash value is assigned to the policy.
  
• A viator may expect to receive 60 to 80 percent of the life insurance benefit. The percentage depends on the viator’s life expectancy and on the face value of the life insurance policy.
  
• Due to a provision in the Health Insurance Portability and Accountability Act of 1996 (HIPAA), terminal patients are sometimes not even required to pay federal taxes on the proceeds from a viatical settlement. But don’t count on this without consulting a tax professional or attorney. You should find out if you will need to pay taxes on the proceeds in advance of the settlement because tax-free dollars are obviously better than taxed ones.
  
• It is also possible to sell only part of the policy. However, some brokers will tell you that you get less value this way, but something is always better than nothing.
  
• Once a settlement is reached, the viator names the investor as his or her beneficiary. Your previous policy beneficiaries may also have to sign a waiver. Then the investor, as the new owner of the policy, takes over premium payments for the rest of the patient’s life. Their risk is that the life expectancy has been underestimated.

Once the patient receives the payment, he or she may more or less spend it on anything — including a fur coat or a trip to Nepal. However, if a viator patient has outstanding debt, his creditors can point out that settling those debts takes legal priority over everything else.

What’s the downside to all of this viatical stuff?

• There are folks who want the life insurance money. They may be family members who know about your policy and are counting on the funds for one reason or the other. The other group who may need money are your doctors, who will be sending bills after you are no longer here. But you can use part of your settlement to make sure they are paid.
  
• You may be taxed. If you live longer than two years, that is a good thing. But in some states, the taxman will then take his portion of your viatical. Make sure you understand what this will cost before you sign on the bottom line.
  
• It is paperwork. Just like getting a mortgage or a retirement plan can mean dealing with brokers, accountants, tax attorneys, and other folks in suits, viatical settlements require a lot of forms, information requests, and negotiation. If you do not like this sort of thing, assign your attorney to do it or find another way to get the money.
  
• You have to do some homework. Find out if your state requires viatical companies to be licensed. If so, you should work with a licensed company. Get references from other families who have worked with a particular company, or call your state insurance commissioner to check for complaints about any particular firm.

Are there other alternatives for me in my situation?

• There are life insurance policies with accelerated death benefits. Check your policy. This is generally only a partial benefit, but would give you cash relief and would not be hard on your beneficiaries.
  
• Take out a loan against the equity in your house or against the cash value of your retirement funds or other assets that you may have. This will provide you with some funds, and it will not totally penalize your heirs. If interest rates are low, the cash value of the assets will more than pay off the debt.
  
• For medical treatment debt, think about going on a payment plan using Visa or MasterCard. Most people are very responsible about their charge cards. But you need to pay only the minimum and your doctors get paid. While this will penalize your heirs eventually, it will relieve your worrying and keep you from feeling guilty every time you see your doctors.

For more references, see the best web site for viatical settlements or our Webography!