Viatical Settlement Provider: An Overview

A detailed exploration of viatical settlement providers, who purchase life insurance policies from policyholders diagnosed with terminal illnesses.

A viatical settlement provider is a company or individual who engages in the purchase of life insurance policies from policyholders who have been diagnosed with a terminal illness. The provider offers a lump-sum payment to the policyholder in exchange for the ownership and beneficiary rights to the policy. This arrangement assists the policyholder by providing immediate financial relief often needed for medical expenses or other pressing financial needs.

How It Works

The Process

• Eligibility Check: The policyholder must meet certain criteria, typically including a diagnosis of a terminal illness with a life expectancy of two years or less.
• Policy Valuation: The provider assesses the value of the life insurance policy.
• Offer: An offer is made, generally a lump sum, which is typically between 50-80% of the policy’s face value.
• Transfer: Upon acceptance, the policyholder transfers ownership and beneficiary rights of the policy to the provider.
• Payout: The policyholder receives the agreed-upon lump sum.
• Future Premiums: The provider becomes responsible for paying any future policy premiums.
• Policy Maturity: Upon the death of the original policyholder, the provider collects the full benefit from the insurer.

Key Considerations

Benefits

• Immediate Cash: Provides the policyholder financial relief when needed most.
• No Future Premiums: The original policyholder stops making premium payments.
• Medical Bills: Enables payment of expensive medical treatments in terminal cases.

Risks and Downsides

• Reduced Benefit: The payout received is typically substantially less than the policy’s face value.
• Privacy Concerns: Medical information must be shared, potentially raising privacy issues.
• Tax Implications: The lump-sum payment could be subject to taxes.

Historical Context

The viatical settlement industry emerged in the 1980s during the AIDS epidemic. Individuals diagnosed with AIDS sought ways to alleviate financial pressures associated with their diagnosis and treatment costs. Over time, the industry expanded to include other terminal illnesses.

Legal and Regulatory Aspects

U.S. Regulations

The viatical settlement industry is regulated at the state level in the United States. Most states require licensing and oversight of viatical settlement providers to protect consumers from fraud and ensure fair transactions.

International Context

Regulation varies significantly across countries. Some countries may have stringent regulations similar to the U.S., while others may have little to no oversight.

Related Terms

• Life Settlement: Similar to a viatical settlement but generally involves policyholders who are not terminally ill, often older adults.
• Life Insurance Policy: A contract in which an insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person.
• Policyholder: The owner of the life insurance policy.
• Beneficiary: The entity designated to receive the death benefit under the life insurance policy.

FAQs

Q: Is the lump-sum payment from a viatical settlement taxable?

A: It depends on various factors, including federal, state, and local tax laws. Consultation with a tax advisor is recommended.

Q: What happens if the policyholder lives longer than expected?

A: The viatical settlement provider still holds the policy and is responsible for paying its premiums. The original policyholder does not owe anything.

Q: Can a viatical settlement affect eligibility for public assistance programs?

A: Yes, receiving a large lump-sum payment can potentially affect eligibility for programs such as Medicaid or Supplemental Security Income (SSI).

References

1. National Association of Insurance Commissioners (NAIC). “Viatical Settlements.” Retrieved from naic.org.
2. Life Insurance Settlement Association (LISA). “What is a Viatical Settlement?” Retrieved from lisa.org.
3. U.S. Securities and Exchange Commission (SEC). “Viatical Settlements: What You Need to Know.” Retrieved from sec.gov.

Summary

A viatical settlement provider plays a crucial role in providing financial relief to individuals diagnosed with terminal illnesses by purchasing their life insurance policies for a lump sum. This arrangement enables the policyholder to access funds during a critical time, though it comes with specific risks and considerations, including reduced benefit amounts and potential tax implications. The industry, shaped initially by the AIDS epidemic, continues to evolve under state and international regulations aimed at protecting policyholders and ensuring fair transactions.