How Life Settlements Fit Into The Impaired Risk Picture
What should you know about the life settlement and viatical business? Plenty!
There has been a lot of controversy and confusion about this industry over the last few years. This article will point out how the two sides of the businesses developed and how they are currently functioning in the marketplace. If you handle impaired risk cases, occasionally you may find clients who can benefit from products in this area.
Definitions vary in different states, but generally speaking, the life settlement market involves the sale of a life insurance policy belonging to an insured age 65 or higher.
By contrast, viatical transactions involve the sale of a life insurance policy on a terminally ill insured who has a life expectancy of less than two years. There is no age requirement.
These markets trace their history back to early 1989, when viaticals emerged as a response to the spread of HIV infections. (The Health Insurance Portability and Accountability Act treats a viatical payment to an insured as a tax-free death benefit if a licensed physician has determined the insured has two years or less to live at time of the policy sale.)
Since that time, however, the market has evolved. Advances in new HIV treatments made it so that individuals infected with HIV are able to live more than two years after diagnosis. That means that many early investors in viatical policies on individuals with HIV have yet to collect on the viatical death benefits.
However, the concept of a person selling ones own life policy has since taken on a new formthe life settlement. As discussed below, these life settlement arrangements are designed for persons with greater longevity who want to sell their policies under much different circumstances.
Today, viatical sales tend to involve lower face amount life policies. Meanwhile, life settlements often appeal to high-net-worth individuals with policies over $1.5 million of face amount. Of the two markets, the life settlement market is the fastest growing. This is due, in part, to the needs of the aging population and to the recognition that some older individuals may no longer want or need their high face value policies.
Where do impaired risk issues come in? Life insureds who have medical impairments may find themselves in unusual circumstances, which justify the possible sale of their policies. These circumstances can include financial need, whether caused by medical treatment or another expense. In this case, the advisor may want to explore with the client the possibility of selling the policy, since in some cases a life settlement could pay the insured more than five times the cash than would a policy loan or other contractual option.