Financial hope for those facing a terminal illness
Diagnosis of a terminal illness often causes us to reflect on our lives and to rethink our priorities. Dealing with the sudden news that you or your loved one has little time remaining can be difficult to process. Being forced to face one’s mortality creates a wide range of emotions from anxiety to helplessness. At times like this, it’s important that supportive loved ones step in to help the patient manage their feelings and provide clarity regarding important decisions that need to be made. Where do you begin?
Major decisions that require financial resources include deciding whether to explore experimental treatment, or forego additional treatment and remain at home surrounded by loved ones. Does the patient have a bucket list involving a dream vacation or mini-vacations to spend more time with family? How much money will it take to achieve any of those goals?
Making an informed decision about how you or your loved one envisions spending your remaining days may require consulting your financial advisor. Once you have decided the direction you plan to take, you’ll want to sit down with your advisor to take an inventory of your financial assets. If you have a life insurance policy and in need of additional cash assets to realize your goals, you may want to explore whether you qualify for a viatical settlement. Selling your policy in the secondary market for an immediate cash payment can provide an unexpected source of funds to achieve your objectives.
The following FAQ addresses the most commonly asked questions about viatical settlements. Feel free to call a member of our team at Trust Life Settlements. We are available at 800-216-2513 to answer your questions.
Viatical Settlements FAQ*
What is a Viatical Settlement?
A viatical settlement is a financial transaction involving the selling of one’s life insurance policy in the secondary market for a cash payment. To qualify for the transaction, the policy owner (known as the “viator”) must be a terminally ill individual with less than two years life expectancy. The third party buyer becomes the new owner of the policy, pays the monthly premiums, and receives the full death benefit when the individual passes away. Viators often use the cash proceeds for a dream vacation, finance medical care, make charitable gifts, or to pay off debt.
Where Did the Term “Viatical” Originate?
The term “viatical” has its genesis in the Latin word “viaticum” which is derived from two Latin roots. The root meaning of “via” is a street or a road, and “cum” means “with” or “along with.” When combined, the literal translation is “to make a journey along with someone.”
When Did Viatical Settlements Become Popular?
Viatical settlements originated in the 1980s in conjunction with the onset of the AIDS epidemic in the U.S. During that time, AIDS victims faced an extremely short life expectancy. Many patients were in need of experimental treatment but the costs were out of reach for most. The market demand for viatical settlements was born out of the need for these patients to have access to financial resources to pay for medical treatment, finance their bucket list and generally to improve the quality of life during their final days. However, as medical advancements were made (the introduction of protease inhibitors) and longevity increased for those living with AIDS, viatical settlement transactions became less common. However, out of this period of time, the life settlement industry emerged.
What is the Difference between a Viatical Settlement and a Life Settlement?
The primary difference involves the insured’s life expectancy. In a life settlement transaction, the policy owner is typically a senior over the age of 65 with a life expectancy of less than 15 years. But as stated above, a viatical settlement is only for those who are terminally ill with less than 24 months to live.
What Other Ways Do Viatical Settlements Differ from Life Settlements?
In a viatical settlement, the proceeds from selling one’s policy are usually far greater than in a life settlement. Another differentiating factor involves the taxation of the proceeds by IRS. In terms of the federal tax laws, usually a viatical settlement is income tax free, whereas life settlements may incur federal taxes (capital gains or ordinary income) depending on the cost basis of the premiums paid. Although many states have enacted tax laws similar to the IRS’ treatment of viatical and life settlements, the tax treatment on the proceeds varies from state to state.
Are Viatical Settlements and Life Settlements Regulated?
Yes. The marketplace for life insurance settlements and viatical settlements is regulated at the state level – not at the federal level. The statutory framework for states that currently regulate viatical and life settlements is primarily based upon the Viatical Settlements Model Act. The Model Act was created by the National Association of Insurance Commissioners (NAIC), a regulatory support organization that forms a national system of state-based insurance regulation in the U. S. The mission of NAIC is to help state insurance regulators establish standards and best practices, and coordinate regulatory oversight.
According to the Life Insurance Settlement Association, 43 states and the territory of Puerto Rico currently have regulations in place, affording approximately 90% of the United States population protection under comprehensive life settlement laws and regulations. Of this group, 31 states have a statutorily mandated two-year waiting period before one can sell their life insurance policy from the time of issue, while 10 states have five-year waiting periods and one state (Minnesota) has a four-year waiting period. Most states (including states with large populations of seniors such as Florida, Maine, California, Pennsylvania, Arizona, Texas and others) have provisions within their life settlement acts where one can sell their policy before the waiting period if they meet certain criteria (i.e. owner/insured is terminally or chronically ill, divorce, retirement, physical or mental disability, etc.).
More States Are Enacting Consumer Disclosure Laws Regarding Life Settlements
Some states have enacted life settlement disclosure laws requiring that policy owners be made aware of life settlements as a possible alternative to lapse or surrender. Six states − Kentucky, Maine, New Hampshire, Oregon, Washington and Wisconsin − require some type of disclosure that informs consumers who are about to lapse or surrender a policy about the life settlement option. California and Florida require a limited-disclosure notice. Although the state of New York has not enacted consumer disclosure laws, it is noteworthy that a large percentage of the secondary market transactions processed by our strategic brokerage partner, Asset Life Settlements, originated from the state of New York.
More recently, (October 2, 2018), the Rhode Island Department of Business Regulation released its consumer-disclosure notice. A new law that takes effect January 1, 2019 requires the department to draft the notice to be posted on its website. The law also requires insurance companies to direct consumers to the state website that includes an Insurance Bulletin discussing alternatives to lapsing or surrendering policies, including life settlements. The bulletin points out that insurance companies must advise policyholders considering making changes to the status of their policies that they should consult a licensed insurance agent or financial adviser and that policy options such as accelerated death benefits, nursing home benefits, critical illness benefits and other benefits may be found on the department’s website at www.dbr.ri.gov/insurance.
It is important to also note that some federal and state government agencies have begun to recommend life settlements as a solution to pay for long-term care expenses or to offset public funds used for Medicaid nursing home care.
How Common Are Viatical Settlements Compared to Life Settlements?
Today, life settlements (also known as senior life settlements) are becoming more popular as aging baby boomers and older seniors learn about the existence of the secondary market for unwanted policies. Previous estimates by LISA indicate the settlement market to be approximately 95 percent life settlements and 5 percent viatical settlements. The decline in the volume of viatical settlements started in the mid-1990s when protease inhibitors became available for AIDS patients and changed the prognosis for these patients.
Based on the secondary market transactions processed by Trust Life Settlements over the past several years, viatical settlements make up a very slight percentage of the overall caseload. While most secondary market transactions involve life settlements for seniors over the age of 65, it’s comforting to know that viatical settlements are an option for those who need it and who qualify.
Call us to request a policy analysis for your viatical settlement
Trust Life Settlements offers free policy analysis to determine if you qualify for a viatical settlement or a life settlement. Contact a member of our team at 800-216-2513.
*FAQ provided courtesy of our strategic partner, Asset Life Settlements, LLC