A terminally ill client may be tempted to sell his life insurance policy proceeds to fund medical treatments and support his family, but viatical settlements are complicated and should be thoroughly investigated.
In a viatical settlement, the consumer (called a "viator") sells his or her life insurance policy to a viatical settlement company (called a "provider") for a lump sum payment that is a percentage of the policy's face value. The viatical provider then becomes the beneficiary of the policy and is responsible for making the premium payments. When the viator dies, the viatical provider collects the full face value of the policy.
Viatical settlements are regulated by each state's insurance departments. State regulations and laws vary widely), but most require viatical brokers and providers to be licensed. A broker will "shop" the policy to several potential providers, looking for the best deal.
The value of an individual insurance policy is based on the following:
- Age and medical condition of the viator
- Financial rating of the insurance company
- Type of insurance policy
- Amount of the premiums
- How often premiums must be paid
- Overall economic conditions
The Health Insurance Portability and Accountability Act ("HIPAA") makes the proceeds of viatical settlements for the terminally or chronically ill tax-free up to the amount paid in premiums during the life of the policy. The Act defines "terminally ill" as having been "diagnosed by a certified physician to have a life expectancy of under 24 months." A person is considered "chronically ill" under the Act if he is "permanently and severely disabled by an illness."
Disadvantages
Receiving a lump sum cash settlement can make a client more vulnerable to creditors who already have outstanding judgments against him. Cashing in a life insurance policy can also affect the client’s eligibility for public assistance programs, including the following:
- Medicaid
- Supplemental social security income
- AFDC (Aid to Families With Dependent Children)
- Other supplemental programs, such as drug purchase assistance programs
Cashing in the death benefits under an insurance policy may also impact insurance benefits for other family members, so it's a good idea to read the policy carefully to understand the consequences of making a viatical settlement.
The Settlement Process
Viatical settlement providers require detailed information about the policy and your client’s health status in order to make an informed decision. The following information must be provided:
- A copy of the insurance policy
- Up-to-date and complete medical records
- Medical information release forms to allow the viatical broker or provider to contact medical providers for additional information as to your client’s diagnosis and prognosis
- Information about how long the client has had the policy, the premium amounts, and the frequency of premium payments
The viatical broker will review the information and ask an independent medical expert to assess your client’s medical condition and life expectancy. The broker will then send all the information to various viatical providers who buy insurance policies as a business. Each provider will assess all the information and make an offer, which will be a percentage of the face value of the policy. The viatical broker will then relay the best offer to you and may give you an idea of the range of lower offers as a point of comparison.
If your client accepts the offer, he will be required to sign the following legal documents:
- A Purchase and Sale Agreement
- Life insurance policy change forms
- Beneficiary Waivers
Payment should be made within days of closing the sales transaction. If your client changes his mind after signing the legal paperwork, he can "rescind" the contract within 15 calendar days (30 days in some states) of receiving payment. The Purchase and Sale Agreement details the process to rescind the contract.
If a viatical settlement broker or provider acts improperly, you can file a complaint with your state's Department of Insurance.