Viatical settlement

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A viatical settlement (from Latin viaticum, something received before death) [1] is the sale of a policy owner's existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. [2] Such a sale provides the policy owner with a lump sum. [3] The third party becomes the new owner of the policy, pays the monthly premiums, and receives the full benefit of the policy when the insured dies. [3]

Contents

Viatical settlements are ordinarily sold by, or on behalf of, an insured who is terminally or chronically ill. [3] [4] As medical advancements improved the lives of those persons living with terminal or chronic illnesses, the life settlement industry emerged. [3] [5]

Viatical Settlement as a term is considered out of date.[ by whom? ] The industry uses life settlement as the formal terminology. Technically, a viatical is a life settlement where the insured has less than two-year life expectancy. However, some jurisdictions, such as the U.S. state of Maryland, use the term viatical settlement instead of life settlement in their regulatory documents. [6]

History

Viatical settlements grew in popularity in the United States in the late 1980s, when the AIDS epidemic peaked. [3] [7] The early victims of AIDS in the U.S. were largely gay men, typically relatively young and without wives or children (the traditional beneficiaries under a life insurance policy), but often covered by life insurance through employment or as a result of investments. The beneficiaries under the policies were often their parents who did not need the money. Viatical settlements offered a way to extract value from the policy while the policy owner was still alive. [5]

At the time, the AIDS mortality rate was very high, and life expectancy after diagnosis was typically short. [3] Investors were reasonably sure that they would collect in a relatively short time. This combination of events caused a surge in viatical settlements as investors and viators saw an opportunity for mutual benefit.

A U.S. Supreme Court decision from 1911 provides the legal basis for viatical settlements. [3] In Grigsby v. Russell, 222 U.S. 149 (1911), Dr. A. H. Grigsby treated a patient named John C. Burchard. [3] Mr. Burchard, being in need of a particular surgical operation, offered to sell Dr. Grigsby his life insurance policy in return for $100 and for agreeing to pay the remaining premiums. [3] Dr. Grigsby agreed and as a result, the first viatical settlement transaction was created. [3] When Mr. Burchard died, Dr. Grigsby attempted to collect the benefits. [3] An executor of Burchard's estate challenged Dr. Grigsby in Appeals Court and won. [3] The case eventually reached the U.S. Supreme Court where Justice Oliver Wendell Holmes Jr. delivered the opinion of the court. [3] He stated in relevant part that

“So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property. To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner's hands.” [3]

The Supreme Court's decision set forth the fundamental principle upon which the viatical settlement and later, the life settlement industry were based: a life insurance policy is private property, which can be assigned at the will of the owner. [3] Viatical settlements were rare for almost eight decades until the onset of the AIDS epidemic. [3]

Early improper activities among a few bad actors produced a fear among consumers regarding viatical settlements. [3] [ weasel words ] Life insurers became concerned about individuals purchasing policies purely for speculative purposes. [3] Today, many states regulate viatical and life settlements and many more are developing legislation and regulations. [3] As of June 2011, the only states that do not regulate viatical settlements are Wyoming, South Dakota, Missouri, Alabama, and South Carolina. [8]

Despite the bad experience of some investors, viatical settlements remain an often valuable tool for the personal financial management of many ill people. A 2002 study showed that among hospice financial counselors who have had experience with viatical settlements, most report positive experiences. [9]

Notable cases

Mutual Benefits

One of the most infamous viaticals cases involved the Mutual Benefits Corporation headed by Peter Lombardi and run by Joel Steinger. The Florida company purchased life insurance policies from people with HIV, and sold shares in the future proceeds to 28,000 investors. In 2004, the Securities and Exchange Commission closed the firm saying it was a $1 billion Ponzi scheme. Lombardi and Steinger received 20-year prison sentences. [10] [11]

Kelco

In August 2008, Stephen L. Keller, the former CEO of Kelco Inc., filed a motion in the United States District Court for the Eastern District of Kentucky, with Judge Karl S. Forester, to dismiss Keller's convictions for conspiracy, fraud, and money laundering. Keller's convictions resulted from Kelco buying and selling life insurance policies that in some cases, had been falsified by 3rd party insurance agents, for insureds with HIV/AIDS applications, then buying the policies in a viatical settlement. [5] Keller's motion was denied on November 12, 2010. His appeal of that denial was also denied, on February 28, 2011. [12]

Viatical settlements valuation

Viatical settlements are valued by examining market prices according to the ‘fair value’ approach using closed life settlement transactions. Market data is collected from multiple providers and that information is available to clients as well as third parties. [13] The pricing of life settlements relies on the quantification of two main variables: the insured's life expectancy and the internal rate of return (which reflects the heightened risk associated with life settlements compared to other assets). The actuarial literature presents various approaches to pricing life settlements, including deterministic, probabilistic, stochastic, and fuzzy methods. [14] [15] [16] [17] The sensitivity of the price of a life settlement to variations in the value of the variables on which it depends (insured’s life expectancy and interest rate) can be determined through two different measures, duration and convexity. [18] [19]

Related Research Articles

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Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to protect against the risk of a contingent or uncertain loss.

Corporate-owned life insurance (COLI), is life insurance on employees' lives that is owned by the employer, with benefits payable either to the employer or directly to the employee's families. Other names for the practice include janitor's insurance and dead peasants insurance. When the employer is a bank, the insurance is known as a bank owned life insurance (BOLI).

A life settlement is the legal sale of an existing life insurance policy for more than its cash surrender value, but less than its net death benefit, to a third party investor. The investor assumes the financial responsibility for ongoing premiums and receives the death benefit when the insured dies. The primary reason the policyowner sells is because they can no longer afford the ongoing premiums, they no longer need or want the policy, to fund long-term care, increased medical costs, or they need money for other expenses. On average, the policyowner receives three to five times more than the surrender value for the policy.

<span class="mw-page-title-main">Life insurance</span> Type of contract

Life insurance is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of an insured person. Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. The policyholder typically pays a premium, either regularly or as one lump sum. The benefits may include other expenses, such as funeral expenses.

Health insurance or medical insurance is a type of insurance that covers the whole or a part of the risk of a person incurring medical expenses. As with other types of insurance, risk is shared among many individuals. By estimating the overall risk of health risk and health system expenses over the risk pool, an insurer can develop a routine finance structure, such as a monthly premium or payroll tax, to provide the money to pay for the health care benefits specified in the insurance agreement. The benefit is administered by a central organization, such as a government agency, private business, or not-for-profit entity.

Variable universal life insurance is a type of life insurance that builds a cash value. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner. The 'variable' component in the name refers to this ability to invest in separate accounts whose values vary—they vary because they are invested in stock and/or bond markets. The 'universal' component in the name refers to the flexibility the owner has in making premium payments. The premiums can vary from nothing in a given month up to maximums defined by the Internal Revenue Code for life insurance. This flexibility is in contrast to whole life insurance that has fixed premium payments that typically cannot be missed without lapsing the policy.

Term life insurance or term assurance is life insurance that provides coverage at a fixed rate of payments for a limited period of time, the relevant term. After that period expires, coverage at the previous rate of premiums is no longer guaranteed and the client must either forgo coverage or potentially obtain further coverage with different payments or conditions. If the life insured dies during the term, the death benefit will be paid to the beneficiary. Term insurance is typically the least expensive way to purchase a substantial death benefit on a coverage amount per premium dollar basis over a specific period of time.

Home insurance, also commonly called homeowner's insurance, is a type of property insurance that covers a private residence. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one's home, its contents, loss of use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.

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Life Partners, Inc. is a life settlement provider headquartered in Waco, Texas. LPI's parent company, Life Partners Holdings, Inc., delisted from the NASDAQ, currently trades on the OTCPK under the ticker LPHI.Q. This follows the company seeking Chapter 11 bankruptcy protection, resulting from a total of $46.9 million in penalties levied against the company and two of its officers.

Mortgage insurance is an insurance policy which compensates lenders or investors in mortgage-backed securities for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer. The policy is also known as a mortgage indemnity guarantee (MIG), particularly in the UK.

Premium financing is the lending of funds to a person or company to cover the cost of an insurance premium. Premium finance loans are often provided by a third party finance entity known as a premium financing company; however insurance companies and insurance brokerages occasionally provide premium financing services through premium finance platforms. Premium financing is mainly devoted to financing life insurance which differs from property and casualty insurance.

<span class="mw-page-title-main">Life insurance trust</span>

A life insurance trust is an irrevocable, non-amendable trust which is both the owner and beneficiary of one or more life insurance policies. Upon the death of the insured, the trustee invests the insurance proceeds and administers the trust for one or more beneficiaries. If the trust owns insurance on the life of a married person, the non-insured spouse and children are often beneficiaries of the insurance trust. If the trust owns "second to die" or survivorship insurance which only pays when both spouses are deceased, only the children would be beneficiaries of the insurance trust.

Medical underwriting is a health insurance term referring to the use of medical or health information in the evaluation of an applicant for coverage, typically for life or health insurance. As part of the underwriting process, an individual's health information may be used in making two decisions: whether to offer or deny coverage and what premium rate to set for the policy. The two most common methods of medical underwriting are known as moratorium underwriting, a relatively simple process, and full medical underwriting, a more indepth analysis of a client's health information. The use of medical underwriting may be restricted by law in certain insurance markets. If allowed, the criteria used should be objective, clearly related to the likely cost of providing coverage, practical to administer, consistent with applicable law, and designed to protect the long-term viability of the insurance system.

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Stranger-originated life insurance ("STOLI") generally means any act, practice, or arrangement, at or prior to policy issuance, to initiate or facilitate the issuance of a life insurance policy for the intended benefit of a person who, at the time of policy origination, does not have an insurable interest in the life of the insured under the laws of the applicable state. This includes the purchase of life insurance with resources or guarantees from or through a person that, at the time of policy initiation, could not lawfully initiate the policy; an arrangement or other agreement to transfer ownership of the policy or the policy benefits to another person; or a trust or similar arrangement that is used directly or indirectly for the purpose of purchasing one or more policies for the intended benefit of another person in a manner that violates the insurable interest laws of the state. The main characteristic of a STOLI transaction is that the insurance is purchased solely as an investment vehicle, rather than for the benefit of the policy owner's beneficiaries. STOLI arrangements are typically promoted to consumers between the age of 65 and 85.

Insurability can mean either whether a particular type of loss (risk) can be insured in theory, or whether a particular client is insurable for by a particular company because of particular circumstance and the quality assigned by an insurance provider pertaining to the risk that a given client would have.

Juvenile life insurance is permanent life insurance that insures the life of a child. It is a financial planning tool that provides a tax advantaged savings vehicle with potential for a lifetime of benefits. Juvenile life insurance, or child life insurance, is usually purchased to protect a family against the sudden and unexpected costs of a funeral and burial with much lower face values. Should the juvenile survive to their college years it can then take on the form of a financial planning tool.

Mutual Benefits Corporation was a Ft. Lauderdale, Florida based investment sales company that operated a huge ponzi scheme selling viatical settlements, with investors losing an estimated $835 million. The principal ring leader of the scam was Joel Steinger.

References

  1. ↑ Entry for "Viatical Settlement" at Merriam-Webster On-Line Dictionary, retrieved November 12, 2012, at http://www.merriam-webster.com/dictionary/viatical settlement
  2. ↑ "Defining a life settlement". lisa.org. Archived from the original on 2016-03-04.
  3. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Life Settlement History, Life Insurance Settlement Association, retrieved March 4, 2012, at http://www.lisa.org/content/51/Life-Settlement-History.aspx
  4. ↑ Xu, Jiahua (2020-01-02). "Dating Death: An Empirical Comparison of Medical Underwriters in the U.S. Life Settlements Market". North American Actuarial Journal. 24 (1): 36–56. doi:10.1080/10920277.2019.1585881. ISSN   1092-0277. S2CID   59483358.
  5. 1 2 3 Braun, Alexander; Cohen, Lauren H.; Malloy, Christopher J.; Xu, Jiahua (2018-06-05). "Introduction to Life Settlements". Harvard Business School Background Note (218–127).
  6. ↑ "Understanding Viatical Settlements" (PDF). p. 2.
  7. ↑ Braun, Alexander; Cohen, Lauren; Elvedi, Mauro; Xu, Jiahua (2019-06-27). "ClearLife: From Prospect to Platform". Harvard Business School Case (219–119).
  8. ↑ Regulation, Life Insurance Settlement Association, retrieved March 4, 2012, at http://www.lisassociation.org/vlsaamembers/legislative_maps/images/Reg-of-viatical-and-life-se.jpg%5B%5D
  9. ↑ Badreshia S, Bansal V, Houts PS, Ballentine N (2002). "Viatical settlements: effects on terminally ill patients". Cancer Pract. 10 (6): 293–6. doi:10.1046/j.1523-5394.2002.106002.x. PMID   12406051.
  10. ↑ Writer, IAN KATZ Staff (7 July 2007). "Accounting firm to pay $3.5 million". Sun-Sentinel.com. Retrieved 2021-09-14.
  11. ↑ "Former executive of Mutual Benefits Corp. gets lengthy prison sentence for insurance fraud". South Florida Business Journal. Retrieved 2021-09-14.
  12. ↑ "Find a Case". Archived from the original on 2016-03-06. Retrieved 2013-06-21.
  13. ↑ "AAP Life Settlement Valuation – Manual" (PDF). AA-Partners Ltd. 2017.
  14. ↑ Zollars, D., Grossfeld, S., Day, D. (2003). The Art of the Deal: Pricing Life Settlements. Contingencies, January/February, 34-38.
  15. ↑ Lubovich, J., Sabes, J., Siegert, P. (2008). Introduction to methodologies used to price life insurance policies in life settlement transactions. Social Science Research Network (SSRN). https://doi.org/10.2139/ssrn.1567264
  16. ↑ Brockett, P.L., Chuang, S.-L., Deng, Y., MacMinn, R.D. (2013). Incorporating longevity risk and medical information into life settlement pricing. Journal of Risk and Insurance, 80 (3), 799-826. https://doi.org/10.1111/j.1539-6975.2013.01522.x
  17. ↑ Andrés-Sánchez, J. de; González-Vila Puchades, L. (2023). Life settlement pricing with fuzzy parameters. Applied Soft Computing, 148, 110924. https://doi.org/10.1016/j.asoc.2023.110924
  18. ↑ Andrés-Sánchez, J. de and González-Vila Puchades, L. (2021). Life settlements: descriptive analysis and quantitative aspects. Management Letters, 21(2), 19-34. https://doi.org/10.5295/cdg.191209lg
  19. ↑ Stone, C. A.; Zissu, A. (2008). Using Life Extension-Duration and Life Extension-Convexity to Value Senior Life Settlement Contracts. The Journal of Alternative Investments, 11(2), 94-108. https://doi.org/10.3905/jai.2008.712600

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