The viatical settlement business just got more complicated. Delaware's highest court has affirmed an insurance company's refusal to pay a death benefit in a viatical settlement.
The ruling puts a damper on policies issued with an eye towards a viatical settlement. An investor purchased a $9 million death benefit for $376,000 just one month after the policy was issued to an insurance trust. When the insured died three years later, the insurance company refused to pay. The court said that the insurer did not have to pay the death benefit because the owner/insured never intended to retain the policy. The insurance policy was just a wager on his life.
The court did not say a life insurance policy was not immediately assignable. It's critical though that a person with an insurable interest actually pay the premiums, at least to start. Still the fact the court allowed a policy to be contested after the incontestability period may drive down the price an insured may receive for a viatical settlement.
A viatical investment involves a life insurance policy owner selling it for a flat amount, or a percentage of the face value death benefit. Typically the insured owner is terminally ill, and the investor receives payment at the time of death. You could find yourself on either side of this investment type.
Purpose for Viaticals
A person may have life insurance, face terminal illness, but needs funds now. There may be medical bills to pay, lost income and a family to support or the need to take care of one's final needs.
A related transaction is a senior settlement, involving life insurance policies of those over age 65 who may be healthy. A senior may have life insurance, with values often $ 1 million or more, but no longer need the death benefit to support survivors, and would like the funds now.
These investment types are attractive because of the chance for a high rate of return, which could be 20 to 40 percent. A need is also met; someone who is facing life's end sooner rather than later receives value from their insurance now, and that value can go beyond dollar signs for their peace of mind and quality of life. Investors are drawn to the return and real-life impact and good possible with a viatical investment.
How a Viatical Investment Works
A viatical investment or settlement company, also called a viatical provider, arranges for paying an insured person an agreed sum for the policy, and finds an investor to fund the buyout. The investor receives payment when the insured dies. Sales commissions and costs are reflected in the amount paid for a policy.
Whether you're selling your policy or you're an investor, do your research. Resources to help include your attorney, and organizations such as the AARP, which offer research materials and guides. Check with government resources, too, such as your state's insurance and securities commissions, your state attorney general's office, and the Securities and Exchange Commission (SEC). Depending on where you live, a viatical may be regulated under state securities laws.
Risks in Investing
Unfortunately, scams and fraud are common with viaticals, and investors have lost lots of money. State and federal law enforcement have taken action against these scams. One SEC case involved billion-dollar fraud against investors.
Fraud can be outright, or the problem may be a lack of disclosure. Examples of fraud include:
- The provider obtains the policy through fraud, and the insurance company or the insured's family contests payment to the investor
- The same policy was sold to more than one viatical investor
- The viatical company goes out of business, or policy premiums aren't paid
Being an Informed Investor
Do your research, and make an informed investment. Make sure you know:
- How the terminal illness of the insured is verified. Is there confirmation by a physician? What are your rights to information about the insured's condition, now and in the future?
- Who owns the policy and makes pays premiums? What rights do you have in the policy?
- Are transactions handled by an escrow company, or the viatical company directly?
Selling Your Policy
You may also be on the other side of a viatical investment, and there are just as many risks when you're selling a policy. First, if you're in need of cash, explore options with your insurance company. You may be able to take a loan against your policy, or the insurer may allow a partial payment of the death benefit, with the rest payable to your beneficiaries later.
If you decide to sell your policy consider these factors:
- Get several quotes from several providers and be sure you have a strong offer for your policy, including costs for commissions
- Understand the cash payment you'll receive compared to the face value death benefit of your policy
- Be sure of the impact of the payment on other aspects of your financial life. Taxes could be a factor, your eligibility for public aid could be lost and creditors could go after the payment
- Confirm how the sale is completed, and whether the third-party services of an escrow company are used
Treat a viatical investment as you would any other investment type. Do your research, get needed professional advice and invest with care and caution.
Questions for Your Attorney
- Can you review the contract for my proposed viatical investment?
- Who keeps the actual life insurance policy, and will the insurance company provide me with information about the policy and the account if I'm an investor?
- How are viatical investors treated when there's a problem, such as an insurance company going out of business?
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