Asset Management - Viatical and Senior Settlements
In a viatical or senior settlement, a person who owns a life insurance policy sells the policy for a lump sum payment, usually a percentage of the policy's face value, to a buyer. The buyer of the policy then becomes the beneficiary, pays the premiums, and receives the full amount of the insurance when the original owner dies. Viatical settlements can be risky for both the sellers and the buyers and should be evaluated carefully.
A senior settlement is simply a viatical settlement in which the seller is at least 65 years old.
How Does a Viatical Settlement Work?
Because viatical settlements depend upon the type and amount of the policy, as well as the owner's age and medical condition, the owner first provides this information, including the policy and premium information, as well as medical records and releases. Typically, a medical expert then reviews medical information and provides a life expectancy for the owner. The amount paid depends upon many things, such as the policy owner's age, the owner's health, and economic conditions and the rating of the insurance company purchasing the policy. If the seller and buyer agree upon the amount to be paid, they execute a contract and change the policy beneficiary. Payment is then issued.
What Should Sellers Consider?
There are both advantages and disadvantages to selling life insurance policies in viatical settlements. The most obvious advantage is the immediate use of income from the sale proceeds. Additionally, sellers who are terminally or chronically ill can exclude from their taxable income any part of the settlement up to the amount they paid for premiums throughout their ownership of the policy. Eligible sellers must either be permanently and severely disabled or must have a life expectancy of less than two years.
However, several disadvantages may follow viatical settlements, as well. For instance, creditors may be more able to collect on outstanding judgments and eligibility for cash assistance programs may be stifled.
What Should Buyers Consider?
Buyers of life insurance policies owned by others should carefully investigate before investing. Although the federal government does not regulate viatical settlements, most state governments regulate the insurance industry, and other offices, public and private, can often provide valuable information, as well. For example, buyers can ask the state regulatory board whether the company is licensed to handle viatical settlements, and information about complaints and lawsuits against companies is also sometimes available from that board. State attorney general offices and Better Business Bureaus also maintain information about complaints and lawsuits. Finally, it is often wise to consult with private attorneys or financial advisers before entering into viatical settlements.
Policy buyers should also secure written evidence of their status after the sale, of the seller's health status, and of the company's ability to pay the policy proceeds when the seller dies.
Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.