4.5.2 Viatical and Life Settlements
A viatical settlement is an investment in another person’s life insurance policy. In a viatical settlement, an investor purchases another person’s life insurance policy for more than the cash surrender value of the policy, but less than the death benefit. When the insured person dies, the investor collects the death benefit. It is also possible to purchase a fraction of the insurance policy.
The viatical settlement industry grew in the 1980s when terminally ill AIDS patients wished to cash in their life insurance policies. The purchaser of the viatical settlement paid the insured person a lump sum and then continued to pay the premiums on the policy. When the insured person died, the investor collected the death benefit of the policy. After the AIDS epidemic waned, the viatical settlement industry expanded into the life settlement industry. The structure of a life settlement is similar to a viatical settlement, but the insured persons are often elderly rather than terminally ill. With a life settlement, the investor is betting that death will occur sometime in the next 10 years, rather than in the next year or two. Because viatical and life settlements are so similar, we will use the two terms interchangeably.
A viatical or life settlement can be seen from two different perspectives: the insured, who is selling the policy, and the investor, who is buying a portion or the whole policy. An insured person may wish to surrender his policy because he needs cash, the policy has become too expensive to maintain, or life changes have occurred that make the policy less necessary. For instance, a policyholder may think that the beneficiary no longer needs the death benefit. The amount of money that the insured receives from the life settlement depends on the age and health of the insured as well as the terms of the policy, but it is almost always more than the surrender value of the policy.
While a viatical settlement