General Practice, Solo & Small Firm DivisionMagazine
Volume 15, Number 3
Counseling a Viatical Settlement
BY KAREN BARRETT
Viatical settlements first arose in response to the AIDS epidemic. Because much of the costs of medical treatment weren’t (and still aren’t) covered, viatical settlements offered a way for AIDS patients to raise money for treatment and other expenses. Unfortunately, in the beginning the industry was unregulated. There were no set values for policies; patients were desperate; there weren’t that many bidders, which kept settlement amounts low; and there was uncertainty over the prognosis of AIDS patients.
Today, the situation has changed. Viatical settlements are more mainstream—they are being used by not only people with AIDS but also people with other terminal illnesses, such as heart disease, cancer, and Lou Gehrig’s disease. In addition, the industry is regulated, guidelines have been developed for establishing the value of a policy, and AIDS patients are much more knowledgeable about their situation intimately—both in terms of their health and in terms of viatical settlements on insurance policies.
A Silent Asset
Lawyers counseling a terminally ill client should consider using an insurance policy as an opportunity for the client to obtain funds through a viatical settlement. This "silent asset" enables people to obtain funds in time to alleviate the stress generated by financial circumstances. The choices include the sale of a policy’s entire benefit, or the sale of a portion of the benefit. Another option is obtaining a loan against some or all of the total benefit. In the case of a loan, the amount of the settlement is repaid from the eventual proceeds of the policy.
In 1997, Congress enacted the Health Insurance Portability and Accountability Act (P.L. 104-191). The act allows people to sell their life insurance "death benefits" without tax assessment if they have obtained certification by a physician that their life expectancy is two years or less. The federal government will only grant tax-free status for viatical settlements if the settlement company is properly licensed to operate in that state. Having a state license will also verify that the firm has official approval to conduct business in a particular state.
There are two types of viatical settlement providers: primary funders, companies that purchase policies directly from an individual for their institutional investment portfolio; and brokers, intermediaries who represent funders or the terminally ill client.
Who Should Consider Viatical Settlements?
Viatical settlements may be appropriate for the client with no beneficiaries who would like cash for immediate use—to pay down debt, realize a dream, take a trip, pay for non-covered medical expenses, or make a special purchase. The client with beneficiaries may also consider a viatical settlement in order to sell or borrow against a portion of the "death benefit" to provide for current needs, pay for extraordinary medical expense, or create special memories. The client with beneficiaries may also sell or borrow against the entire "death benefit" and make another form of bequest. Perhaps the client prefers to purchase property, establish a bank account, invest in a business or stock, or simply leave the estate debt-free.
Viatical settlements aren’t for everyone. Your client may want to consider other options. For example, some insurance companies offer accelerated benefits for those with a terminal illness. As mentioned above, your client could try to get a loan from a lending institution with the life insurance policy as collateral. Also, an older whole life policy may contain sufficient cash value for your client’s immediate cash needs.
A life insurance policy is an asset. Lawyers and their terminally ill clients need to review the purpose and disposition of this asset. Understanding the financial option of a viatical settlement will help lawyers to counsel clients with a terminal illness in the preparation of a will, estate, or trust.
Checklist for Counseling a Viatical Settlement
4 What is the amount of money needed by the policyholder?
4 What is the intended purpose for the funds? Will the funds be adequate to meet policyholder’s needs?
4 What is the size of the insurance policy? The economics may not justify the transaction if the policy is under $25,000.
4 Does the client have beneficiaries? If so, what are the financial circumstances of the beneficiaries?
4 Does the client have life’s basic necessities without a viatical settlement?
4 Will the client meet the requirements for the tax benefit, and does the transaction meet the client’s objectives if the prognosis is greater than two years?
Supporting article: Negotiating a Settlement
Karen Barrett is Senior Vice President and Chief Marketing Officer for Enhance Life Benefits LLC (800/834-6238), a recognized leader in the viatical settlement field.