For those interested in a viatical settlement for themselves or a loved one, knowledge of how these arrangements ideally work, who can benefit, and existing regulations can help obtain the best deal.
What NOT to Do with a Viatical
Keep in mind that I'm talking about viatical settlements as something for you or a loved one to use, NOT as an investment. There are countless companies out there that may try to get you to invest in a terminally ill person's viatical policy, and "collect" on this investment if and when the person dies. Also, there are newer viatical policies called "senior settlements," which basically allow healthier seniors to sell their life policy as a viatical - and, for many reasons, these are also controversial.
The possibilities for investor abuse are endless, so stay with the consideration of only a direct viatical settlement to be purchased by a reputable firm. Still, in the right circumstances viatical settlements can be useful for some terminally ill people.
How a Vitatical Works
Viatical settlement firms generally require the potential "viator" to have a terminal illness and an estimated life expectancy of 36 months or less, though some companies will buy policies from people with life expectancies of up to 60 months. Life insurance policies accepted can include whole, term, and universal. In many cases group policies also can be sold. Most individual policies need to have been in force at least about two years, while most group policies that are converted must not require a new contestability period (time in which ownership can be challenged).
The most important factor affecting the purchase price is life expectancy - the lower the viator's life expectancy, the higher the offer. Other factors affecting price include the rating of the insurance company's financial health, premiums owed (viatical companies pay premiums until the viator's death), and interest rates (as settlement companies borrow money paid to policy holders).
Viatical settlements received a substantial boost in 1996, when Congress granted tax-free status to settlement proceeds for those with life expectancies of 24 months or less, or who meet specific criteria covering chronic illness. To receive these tax benefits, the viator must do business with a company that is properly licensed in the state where the transaction is being made or, in states without licensing requirements, with firms that comply with the National Association of Insurance Commissioner's (NAIC's) Model Act and Regulations on viatical settlements. For a list of states with regulations and a look at the NAIC's guidelines, go to http://www.insure.com at http://info.insure.com/life/viatical/vst...
