Viatical settlements involve the buying and selling of life insurance policies. Investors buy the life insurance policy of a terminally ill person for a percentage of the policy’s value, in hopes of receiving the full settlement when the person dies. (Learn More — What Are Viatical Settlements?)
For a terminally ill person, selling their life insurance policy means being able to access this money while they are still alive. However, there may be tax penalties, and their health information may be shared while they go through the process of selling. (Learn More — The Benefits and Risks of Selling a Life Insurance Policy)
For an investor, viatical settlements may offer a decent return that isn’t impacted by the stock market or the ups and downs of Wall Street. But the deal can go bad for investors if the original policyholder lives longer than expected, or if the insurance company goes out of business or refuses to pay the premium for any reason. (Learn More — The Benefits and Risks of Purchasing a Life Insurance Policy)
Because viatical settlements have been mostly unregulated in the past, they’ve often been associated with scams and fraudulent companies, including companies that don’t pay their clients and or obtain fraudulent life insurance policies. (Learn More — What Kind of Scams Are Associated With Viatical Settlements?)
In order to avoid being scammed, potential clients should be on the lookout for companies with no history, or salespeople trying to make a deal too quickly without explaining the fees or risks involved. (Learn More — Signs of a Viatical Settlement Scam)
In addition to choosing a well-established viatical settlement company, individuals should check with their state’s insurance department and an independent financial professional or attorney before signing any contract. (Learn More — How to Find a Viatical Settlement Broker)
What Are Viatical Settlements?
With viatical settlements, companies or individuals buy someone else’s life insurance policy. Usually, they are buying the policy off someone with a terminal illness, for a percentage of the final life insurance benefit payout.
For example, if someone with a terminal cancer has been given three more years of life expectancy and has a life insurance policy with a face value of $150,000, a company may buy that policy for 50% of its face value. This means they will pay the terminal cancer patient $75,000 and expect to receive the $150,000 settlement benefit (minus any broker fees or other fees) in three years, when the terminal cancer patient dies.
Senior settlements work in a similar manner to viatical settlements, but in senior settlements, the policy sellers do not have to be terminally ill. In many cases, the policyholder must be over the age of 65 to qualify for senior settlements.
The Benefits and Risks of Selling a Life Insurance Policy
For those selling their life insurance policies, the draw of viatical settlements is that they’ll be able to access the funds from their life insurance policy while they are still alive. This may be especially appealing to those who are in need of immediate funds, or those who don’t have a family or loved ones to receive their settlement once they pass away.
There are, however, risks involved in selling a life insurance policy. There may be tax consequences, depending on the nature of the sale and where the policyholder lives. Privacy is also an issue, as the policyholder’s health information may be shared with potential investors throughout the application and sale process. Lastly, the policyholder may be unable to purchase another life insurance policy.
Benefits and Risks of Purchasing a Life Insurance Policy
Investors seeking to buy a life insurance policy off someone with a terminal illness may find the offer appealing for a number of reasons. Because viatical settlements don’t have anything to do with stocks or bonds, they don’t fluctuate with the stock market. The settlements, when planned and executed as expected, can offer an 8% to 10% return on investment, and possibly more, if the terminally ill policyholder dies sooner than expected.
For some investors, there is a moral benefit as well, in being able to offer a terminally ill person a chance to enjoy the funds they wouldn’t be able to access otherwise.
Of course, there are also risks involved when purchasing a life insurance policy. One of the greater risks is that there will be a health miracle or medical breakthrough that allows the policyholder to live much longer than expected. In these cases, the purchaser of the policy may make much less of a return on the settlement and possibly even lose money if there are continued fees or premium payments.
Insurance companies can go bankrupt. They may also fight paying out the life insurance policy based on a technicality spelled out in the “small print.”
What Kinds of Scams Are Associated With Viatical Settlements?
One of the greatest risks to people who buy and sell insurance policies is the potential of being “scammed” by an individual, company, or viatical settlement broker. Because viatical settlements are not traditional investments and not considered a “security,” they have historically been less regulated than most other investments.
In some states, almost anyone can work as a viatical settlement broker. Because of this, the viatical settlement industry has long been plagued by less-than-scrupulous companies who have deceived investors and buyers.
Some common viatical settlement scams include:
- Companies that take money from investors, or purchase life insurance policies, and never pay out. They may go bankrupt or simply disappear when people begin looking for their money.
- Companies that help terminally ill people obtain fraudulent life insurance policies, then sell those policies. When the terminally ill person dies, the insurance company may then refuse to pay the life insurance benefit because of the fraud.
- Companies that sell life insurance policies as viatical settlements when the policyholders were healthy seniors and not terminally ill.
- Companies that sell “term” life insurance policies as actual life insurance policies. In this case, the policy buyer may get nothing if the original seller lives beyond the term covered in the policy.
Signs of a Viatical Settlement Scam
For those looking to sell or invest in a life insurance policy, choosing the right viatical settlement broker can mean the difference between making a calculated financial decision and losing money in a scam.
Signs that a viatical settlement company may be a scam include:
- Someone trying to sell you on a “get rich quick” scheme involving viatical settlements. There’s no guaranteed “easy money” in investing. If there were, everyone would be doing it. If what you’re hearing sounds too good to be true, it probably is.
- A viatical settlement company or broker that hasn’t been around long or has no history that can be found through research. If a quick online search reveals a viatical settlement broker being called a scam, that’s a huge red flag. If there’s no record of a company, or if it was just recently established, that’s a warning sign too. The company may be a fly-by-night operation that operates under different names to escape the heat from clients it has wronged.
- A viatical brokerage that doesn’t explain the possible risks or tries to add extensive or hidden fees to the deal. Someone who’s just trying to get you to sign on the dotted line may be hoping to avoid explaining the less-than-appealing parts of the settlement or the excessive fees they’ve tacked on to the agreement.
How to Find a Viatical Settlement Broker
Although viatical settlements were largely unregulated during their peak, more financial and law enforcement agencies are taking notice of the industry and trying to put rules in place to protect buyers and sellers from fraudulent companies. This may make it harder for scam viatical companies to market to potential life insurance policy sellers and buyers. Some states, such as New York, have also now put regulations on viatical settlements in place.
Before selling or purchasing a life insurance policy, an individual may wish to speak to their state’s insurance office to discuss their tax rules or regulations regarding viatical settlements or the selling or purchasing of life insurance.
Finding a reputable viatical settlement broker that has a long and proven history of helping individuals sell or purchase viatical settlements can provide peace of mind. Such a broker should be able to clearly explain the potential risks and benefits, and answer questions like:
- Is my return or payment guaranteed?
- Will I ever be asked to pay a premium on the policy again?
- What are the exact fees being charged? Will there be any future fees?
- Will I be provided with the exact rules and regulations laid out in the original policy?
Even when dealing with a reputable viatical settlement broker, it’s important to meet with an unbiased financial professional or attorney and show them the contract before signing. They can help to identify any unexpected risks or fees, and ensure the agreement is valid.
Viatical Settlements. Better Business Bureau.
Selling Your Life Insurance? Proceed with Caution. (January 2010). AARP.
Warning: Viatical Settlement. (October 2017). Bob Carlson’s Retirement Watch.
Betting on Death in the Life Settlement Market – What’s at Stake for Seniors? (April 2009). North American Securities Administration (NASAA).
Buying Viatical Settlements. State of Idaho Department of Insurance.