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.
Life settlements also can be used with healthy clients. For example, some clients may own older UL policies that are underfunded and that have cash values that are too low to keep the policy in force without making substantial contributions. If such an insured cannot pay the necessary additional premium, has little cash value and no longer wants the death benefit, selling the policy may be a better alternative than letting it lapse.
In some cases, insureds in this situation may want to buy a new long term care or life policy with the proceeds of the life settlement. This, too, may be a better alternative than lapsing with no insurance coverage at all. It is also a feasible alternative, since the life settlement sale does not require the person to be in poor health or terminally ill in order for the transaction to occur.
How does an advisor begin the transaction process? Life agents work through life settlement brokers to obtain several bids. The goal is to match the investment company offer with the clients needs.
Throughout the process, the agent needs to act in the best interest of the client.
To ensure the transaction is suitable, the producer needs to review not only the clients needs and personal circumstances, but also the providers and procedures used in the secondary insurance industry, as this business is sometimes called.
To guide the client in making the right decision, the agent can obtain an objective valuation of the price offered for the life settlement.
Currently, the prices offered are made by various investment companies and individuals operating in a free market. An independent review would provide a good second opinion. Such a review can be made by actuaries, some of whom are entering this market on a consultation basis. Obtaining such review particularly is important when the clients are seniors and the policy face amounts are very large.
In sum, this is a market that may be appropriate for some of your clients, whether in good health or not. Debate does exist about whether a life settlement is good for the general public. My view is, this is an individual decision. The advisor and client need to work together to evaluate the risks and opportunities involved.
Teresa R. Winer, FSA, MAAA, is an independent actuary based in Atlanta and author of a Society of Actuaries report on the viatical and settlement industry. Her e-mail address is firstname.lastname@example.org.
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 31, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.