Viatical settlement
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A viatical settlement is the sale of a life insurance policy by the policy owner before the policy matures. Such a sale, at a price discounted from the face amount of the policy but usually in excess of the premiums paid or current cash surrender value, provides the seller an immediate cash settlement. Generally, viatical settlements involve insured individuals with a shorter life expectancy. In countries without state-subsidized healthcare and high healthcare costs (e.g. United States), this is a practical way to pay extremely high health insurance premiums that severely ill people face. A life settlement is a similar transaction but involves insureds with longer life expectancies.
From the perspective of the investor, purchasing a viatical settlement is similar to buying a zero coupon bond with an uncertain maturity date. The return depends on the seller's life expectancy and when he or she dies.
Viatical settlements grew in popularity in the United States in the late 1980s, when the AIDS epidemic first hit. The early victims of AIDS in the U.S. were largely gay men, many of whom were not particularly old. They often had no wives or children (the traditional dependants in a life insurance policy), but they had life insurance policies through employment or due to other investment activity. The dependants on 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 policyholder was still alive.
At the time, the AIDS mortality rate was very high, and life expectancy after diagnosis was typically short. Investors were reasonably sure that they would collect in a relatively short time. This combination of events caused a surge in viatical settlements as both investors and viators saw an opportunity for mutual benefit.
Viatical settlements eventually developed a bad reputation in the investing community. The companies that purchased them from policy holders typically resold them to individual investors. Salespeople were paid large commissions to push the settlements, which were not conventional investments and which were misunderstood by many investors. The government regulatory agencies had little experience and few regulations dealing with viatical settlements, and the industry attracted some unscrupulous dealers.
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. [1]
One of the most infamous viaticals cases involved the Mutual Benefits company headed by Peter Lombardi in Florida which had 28,000 investors and had focused in the paying HIV clients. In 2003 the Securities Exchange Commission closed the firm saying it was involved in a $1 billion Ponzi scheme. Lombardi is now serving a 20-year prison sentence.[2]
[edit] References
- ^ Badreshia, S., Bansal, V., Houts, P. S., Ballentine, N.: "Viatical settlements: effects on terminally ill patients", Cancer Practice, 2002 Nov-Dec, 10(6):293-6. Read at Entrez PubMed. URL Accessed November 17, 2004.
- ^ Lawyers' Indictment in $1 Billion Ponzi Scheme Shocks Legal Circles - New York Lawyer - January 26, 2009]
