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For those who haven’t yet heard of a viatical settlement (life settlement), it’s the sale of a person’s active life insurance policy for its cash surrender value, usually in the form of a lump sum. The buyer of the life insurance policy will then be responsible for the monthly premiums and receive the policy’s full benefits once the insured dies.
The term “viatical settlement” is used to define settlements involving insured persons who are chronically or terminally ill. A chronic illness generally leads to the patient’s inability to perform two or more activities required to maintain a healthy life on their own, such as eating, using the restroom, taking a bath, and dressing.
Chronically ill patients also include those who suffer severe cognitive impairment, thus requiring strict supervision to protect them from threats to their health and safety. For more information on the levels of disability considered to make a patient chronically ill, the reader can visit the U.S. Secretary of Health and Human Services website to learn more.
The History Behind Viatical Settlements
In the 1980s, the AIDS epidemic was at its peak. As most insured victims of AIDS back then were predominantly young gay men, their parents became the beneficiaries rather than spouses or children. Additionally, the parents of these men had no need for the insurance money.
People living with AIDS wanted a way to extract value from their policies while they were still alive and began taking advantage of the viatical settlement. The surge in viatical settlements by AIDS patients got the attention of viators suffering from all sorts of terminal illnesses, as well as investors who liked the idea of a return on their investment in a short period.
In 1911, a man named John C. Burchard was in need of a particular medical operation but lacked the money to get it done. Burchard offered to sell his insurance policy to Dr. A. H. Grigsby for $100 and for agreeing to take over the remaining premiums.
Dr. Grigsby agreed and purchased Burchard’s policy. Burchard ended up passing away not long after this, and when it came time for the insurance provider to pay up, they refused, which led to a civil case and subsequent court ruling.
Grigsby v. Russell (the owner of the insurance company) allowed for the first historical viatical settlement transaction. The Grigsby v. Russell, 222 U.S. 149 (1911) decision can be read in PDF by following the link.
Three Trends Are Bringing the Viatical Settlements Market Into Focus
Three market trends have a notable impact on the viatical settlement market.
Advances In Underwriting
The life insurance industry is adopting better and quicker underwriting methods that produce predictable mortality profiles. Not only that, but the medical industry as of recent has been exploring various methods in evaluating an individual’s health.
Some of these evaluations measure health impairments as well, which means they can roughly estimate a patient’s lifespan. For example, Big Data is collected by wearables and stored on the Cloud to be analyzed by artificial intelligence.
Consumer Awareness Increasing
The baby boomer generation continues to make headlines in many sectors, especially investment with the latest trend showing growing interest in the viatical settlement space.
One of the most critical factors that drive investment in any industry is the supply and demand of assets. In this case, it’s life insureds knowing and understanding that they have the option to monetize their life insurance policies.
Growing consumer awareness that viatical settlements exist is gradually leading to more viators selling their policies. In turn, more companies are offering services related to the sector. To learn what some of these services are, you can check here.
Investment Funds Adopting Viatical Settlements
The retail investment industry is growing more interested in viatical settlements as investment funds. Federal law considers most life insurance policies to be assets in their own right. This consideration gives the owner of a life insurance policy the right to sell it.
The insured benefits from selling their life insurance policy to an investor because they get more money opposed to if they were to surrender it to the insurance company. Typically speaking, life settlement investment companies will pay up to 25 percent of the death benefit.
The most significant risk associated with viatical settlement investments is the possibility that the insured will live longer than expected, leading to the investor paying more in premiums than the benefits of the policy are worth.
Last but not least, investment institutions see viatical settlements as a great way to maintain their balance sheets.
Ryan Yarbrough is a small business consultant, speaker, and the manager at Davis Financial Services, a small business consulting firm.