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Viatical frequently asked questions

 
Q:   Are investments in viatical settlements securities?
A:  

The sale or offer for sale of investments in viatical, senior or life settlement contracts, whether whole, fractional or pooled, are treated as securities under the Oregon Securities Law. Viaticals and life settlements are a type of investment contract and therefore subject to the registration and licensing requirements of the law. Before you buy an interest in a viatical or life settlement, check with the Division of Finance and Corporate Securities to learn whether the offering is registered and the salesperson licensed.  

All persons involved in the offer and/or sale of viatical or life settlement investments should be aware of the nature and extent of the registration and antifraud provisions of the Oregon Securities Law, as well as the applicability of these provisions to every offer and/or sale of a security.


Q:   Are there any other special risks presented by investment in viatical settlement contracts?
A:  

Investment in viatical settlement contracts also present special risks in the areas of term insurance, group policies and the issue of investing in policies that are still within the contestability period.  

Term policies. A term policy is issued for a specific time period. The insurance company will not pay the death benefit if the viator outlives that time period. If you purchase an interest in a term policy, you will be dependent on the viatical company from which you purchased the viatical settlement contract to be able to renew the policy when the term expires.  

It is possible that the insurance company will not allow renewal of the term policy. Because the insured has viaticated the policy (or sold it in a viatical transaction) he or she must be either terminally ill or have a life threatening health condition. That means the person is uninsurable. So unless the policy has a guaranteed renewal provision, the viator could not go out and buy more coverage. So the investor may not be able to renew a term policy at all.

Group policies. A group policy presents some of the same problems as a term policy. A group policy insures the members of a specific group of people, usually the employees of a company. The biggest risk for someone who invests in a group policy is that the policy can be terminated by the employer or the insurance company. Although the policy may contain a provision allowing conversion to an individual policy, there may be limits or restrictions on the right to convert. As with the individual policy described above, it is possible that the insurance company will not allow conversion because the insured has viaticated the policy and therefore must be either terminally ill. Even where conversion is allowed, the insurance company may charge additional premiums once the policy is converted.  

Contestability period. The insurance company may "contest" the policy for a two-year period after issuance if the company finds a reason to cancel the policy. The insurance company will not pay the death benefit if the viator dies within the contestability period, and the company has a reason to cancel the policy.  

One example of a reason to cancel would be if the viator did not truthfully answer a question on the policy application. The policy may also be canceled if the viator commits suicide within the two-year contestability period.


Q:   Are viatical settlement investments appropriate for the small investor?
A:  

Viatical settlement investments should only be made to suitable investors or other persons that the viatical issuer reasonably believes, after inquiry, to be suitable investors. A good definition of a suitable investor would include: 

  • An organization described in Section 501(c) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, with liquid net worth in excess of five million dollars ($5,000,000) according to its most recent audited financial statements.
  • A natural person who, either individually or jointly with the person's spouse, (1) has a minimum net worth of one hundred fifty thousand dollars ($150,000) and had, during the immediately preceding tax year, gross income in excess of one hundred thousand dollars ($100,000) and reasonably expects gross income in excess of one hundred thousand dollars ($100,000) during the current tax year, or (2) has a minimum liquid net worth of two hundred fifty thousand dollars ($250,000). "Net worth" shall be determined exclusive of home, home furnishings, automobiles, and assets employed in a trade or business. Other assets included in the computation of net worth shall be valued at fair market value. The aggregate amount of viatical investments of each natural person shall not exceed 10 percent of their net worth, as defined above.

It is important to emphasize that viatical settlement investments are rarely, if ever, appropriate for seniors or others on a fixed income. They are also inappropriate for individuals as a first investment or as the only investment a person has.


Q:   Aren't returns on viatical settlements guaranteed?
A:  

Viatical companies frequently try to convince investors that an investment in a viatical is "guaranteed" because everybody dies. But that is not the proper way to measure the worth of any investment, even a viatical settlement. What is not guaranteed is the date of death of the insured person (viator). The return on a viatical settlement is completely dependent on when the viator dies. At a minimum, you should expect to have your principal returned with the additional amount promised by the viatical company, but that is hardly the same as saying that your return is guaranteed as of the projected date.  

The viatical salesperson will ask you how long you want to invest. Your decision determines the amount of return on your investment, but not the rate of return. For example, let's say you want to invest $10,000 for two years. The company tells you that your return will be $2,280, for an annualized return of 11.4 percent per year. However, if the viator dies in four years, instead of two, the annualized return drops to 5.5 percent. The longer the viator lives, the lower your annualized rate of return.  

However, that is not the worst case scenario. It is possible that your return could be negative if the reserve fund set aside to continue to pay policy premiums is depleted before the viator dies. You and other investors could be the ones left to continue making premium payments without which the policy would terminate. If that premium were unpaid, the policy would be canceled and you would lose your entire investment.

And remember, just because you want to continue making premium payments does not mean all of the other investors will wish to do so. You could still lose your investment if the other investors who were pooled together with you to purchase the policy now fail to make their pro rata premium payments for the next period. In that case, you could be offered the right to assume the interest of one or more of those other investors. If you were to do so, your pro rata share of the policy proceeds would increase along with a larger responsibility for any additional premium.  

Few, if any, insurance companies list viatical settlement investors as beneficiaries on the life insurance policies. The viatical companies are the listed beneficiaries. In the event the viatical company goes bankrupt, the purchasers of the viatical investments have an equitable interest in the proceeds of the policy and are creditors of the viatical company. When the viator dies, the viatical company receives the policy proceeds first. How those proceeds are distributed after that is determined by the bankruptcy laws.  

Guessing when anyone will die, even someone with a terminal illness, is inherently risky. Can you live with that risk? Before you invest in a viatical, ask yourself how a delay in having your principal returned, or its outright loss, would affect your life and lifestyle.


Q:   Can I be asked to make additional payments beyond my initial investment?
A:  

The insurance company will cancel the policy in which you have invested if periodic premium payments are not made to keep the policy in force. The insurance company will not pay death benefits if the policy is not in force.  

It is likely that a portion of the money you invest in the viatical will be set aside to pay premiums. However, no one can predict when someone, even a person with a terminal illness, will die. If the viator lives longer than expected, investors could be required to pay additional premiums to keep the policy in force.  

Even if a viatical seller tells you that you will not be required to make additional payments, ask the seller who would make such payments if the viator lives longer than expected.


Q:   Can I get my principal back after a period of time even if the insured has not died?
A:   Usually you cannot obtain your money until the viator dies. A viatical settlement investment is not a liquid investment. Unlike stocks or bonds, there is no established secondary market where a viatical can be sold on demand. An investor cannot get his or her principal back until the life insurance policy matures. That means the purchaser of a viatical settlement investment must wait for the death of the viator before the investment is returned. And it makes no difference if the investor only wanted to invest for a finite period of time. If the viator is still alive, the policy has not matured and the investment cannot be returned.
Q:   Can I lose my investment in a viatical settlement?
A:  

Yes. Viatical settlement investment companies sometimes advertise that investors cannot lose their investment, as one can do in other types of investments. This is false. The Oregon Division of Finance and Corporate Securities has received complaints from a number of individuals who have invested in viaticals and have lost their entire investment. As with any investment, an investment in viaticals includes risk and anyone considering investing in them should research the matter thoroughly before investing.


Q:   Didn't 60 Minutes report that viaticals are the "perfect no-risk investment"?
A:  

Some promotional materials from viatical companies still use this out-of-context quote from a 60 Minutes program broadcast in 1995. Program host Morley Safer actually said:  

"And, sadly, the deadliness of AIDS makes (viatical settlements) a perfect no-risk investment: quick profits guaranteed in the death futures market with enough buyers available for an AIDS patient to shop around. Value is graded on the bleakness of medical charts."  

But as outlined in Kiplinger's Retirement Report (Dec. 1998), this show aired before the death rates of those infected with HIV began declining dramatically because of new drug treatments. The prognosis for patients with AIDS and HIV is far different today than it was five to eight years ago. And guessing when someone will die is never a sure thing.  

There is no such thing as a "no-risk" investment and not every investment is a good match for every investor. Viaticals are definitely risky and may not be "perfect" for you.


Q:   How can there be risks if I am a beneficiary on the policy?
A:  

The person who buys a life insurance policy is the owner of the policy. The owner decides who the beneficiaries of the policy will be. If the owner sells that policy (now called a viator), the investors become the new beneficiaries and therefore are entitled to receive the death benefit when the viator dies. The new owner of the policy may be the investors, the viatical company, or the escrow agent/trustee.  

Only the owner of the policy, not the beneficiary, has a right to make premium payments directly to the insurance company so that the policy will remain in force.  

If the reserve funds that have been set aside to pay premiums run out, you will be dependent on the viatical company to collect the additional premium money from investors and to pay premiums promptly. If that company goes out of business or otherwise fails to collect premiums from investors, you may not be able to pay the premiums yourself if your are only a beneficiary.


Q:   How do I know if the viatical investment is legitimate?
A:   This is a very difficult question to answer. There is no easy way to know whether the underlying insurance policy was obtained without fraud or to know whether the viatical company and the escrow agent/trustee will be around for the duration of the insurance policy. Be sure that the viatical seller gives you a prospectus and that the offering is registered with the Division of Finance and Corporate Securities. And make certain that all of your questions are answered by the seller.
Q:   How do viatical settlement investments operate?
A:  

This description applies to brokered arrangements.  

The length of time of a viatical settlement investment starts with a determination by someone about how long the owner of that policy (viator) is going to live. At some point in the process of selling the policy, the viator's medical records were reviewed and an estimate made about how long that person would live. The viatical company then pools the funds of investors to purchase policies. The viatical company matches investors (who all want to invest for the same period of time) with policies of viators who are expected to live for that period of time, usually anywhere from 12 to 48 months. The investor decides how long their money will be invested. The longer the investment period, the higher the return on the investment.  

A typical viatical settlement works as follows: Let's assume an investor wants their money tied up for two years. Viatical settlement brokers rarely keep a portfolio of viatical settlement contracts, but instead go out and find policies that meet the requirements of the investors. The viatical company pools the investor's funds with the funds of other investors to purchase a policy of a viator who is expected to live for only 24 months. The viatical company uses investor funds to purchase the policy. The viatical company is then named as the beneficiary on the policy, not the investors. The viatical company will track the name of the investors and their pro rata share of the policy proceeds. Investors in brokered arrangements have an equitable interest in the policy, but are not listed as beneficiaries on the policy.

Once the viatical company has purchased a policy, you should receive some sort of notice that indicates your ownership interest in the policy. You should also receive some minimal information about the viator but laws regarding the confidentiality of health and medical records prohibit the disclosure of personal information. You should receive periodic updates of this information, but many companies provide such updates only yearly. 

The viatical company sets aside enough money from the initial investment from investors to pay the insurance premiums for the period that the viator is expected to live plus an additional period. In our example, the company would have collected sufficient funds to pay premium for two years.  

Because it is impossible to predict how long a person will live, even someone with a terminal illness, the viatical company is expected to also maintain a reserve fund that can pay premiums for another period of time beyond the original projection. Here, with a contract of 24 months, most viatical companies maintain a reserve of at least six months.  

If the viator dies within the projected time period, the viatical company files a claim with the insurance company and distributes the proceeds of the policy to investors on a pro rata basis. If the viator does not die within the projected time, the premium on the policy must continue to be paid so that the policy will not be canceled. See answer to question about if viator does not die.


Q:   Isn't investing in viatical settlements a humanitarian thing to do?
A:  

As part of their sales presentation, a viatical company may try to convince you that your investment serves an important, humanitarian purpose. They say that your investment enables terminally ill patients to live the last part of their lives with the money to afford greater comfort and dignity. The patient needs the money while they are still alive, rather than merely paying a benefit to someone after they are dead. And viatical settlements guarantee the payment of life insurance premiums when terminally ill people are most likely to stop payment - when they are too ill to work and cannot continue paying their life insurance premiums.  

This argument plays on human compassion and the interest in having a "win-win" arrangement that the investor can feel good about. However, the realities of the viatical investment market reduce some, if not all of this appeal.  

At best, your investment gives you a vested interest in the timely death of the insured. The longer the viator lives, the longer you will forego any return on your investment. While you may have initially invested in this vehicle because you saw it as a humanitarian gesture, you invested for a finite period of time - usually between 12 to 48 months - and as time goes by you are placed in a position of anxiously awaiting the return of that principal. This means you may grow impatient waiting for the death of that person you initially wanted to help. The "death futures" market is as unpredictable as any commodities market, but in this case, there is a moral component that many investors find troubling. This again emphasizes why it is important to be sure that a viatical settlement investment is appropriate for you.  

In addition, terminally ill individuals who want to sell their policies now have plenty of bidders. Regulators across the U.S. are seeing a surplus of investor money floating around and a shortage of "viable" policies. A viable policy from an investor point of view is one covering the life of an individual most likely to die within their life expectancy period. There is also evidence that the "best" policies are being purchased by large institutional investors, including companies formed for this purpose.


Q:   Need more information?
A:  

Investor Information Program: Protect yourself against fraud  

Securities and Exchange Commission 

Oregon Economic Development Department


Q:   What are life settlements and senior settlements?
A:   A life settlement is similar to a viatical settlement, but the life insurance policy is purchased from an elderly person. The person selling the policy may not necessarily be suffering from any particular life threatening illness, but has merely made the decision to sell their life insurance policy. These arrangements may also be called senior settlements.
Q:   What are viatical settlements?
A:  

A viatical settlement, also known as a life settlement, is the sale of the benefits of a life insurance policy to a third party. The owner of the life insurance policy (called the viator) sells the policy for a percentage of the death benefit. The buyer becomes the new owner and/or beneficiary of the life insurance policy, pays future premiums, and collects the death benefit of the policy when the insured dies.  

There are two types of viatical settlement companies. The first type buys life insurance policies directly from ill people, using either private funds or money received through the sale of company stock. These companies themselves hold all the rights to the insurance policy and act as the designated beneficiary of the policy. The viatical settlement industry deems these transactions "non-brokered" because the viatical settlement provider purchases the policies directly. Investors participate by being stockholders in the viatical settlement company.  

The second type of viatical settlement company acts as a broker or intermediary who matches a group of potential buyers with a life insurance policy available for the sale, rather than directly purchasing the policy itself. The majority of companies in the viatical settlement industry fall into this second category which is referred to as "brokered viatical settlements." The broker does not own the insurance policy, but the broker is entitled to a percentage of the death benefit or purchase price, usually four to six percent, as compensation for its services. Investors participate by being co-owners of an equitable interest in the life insurance policies purchased by the viatical settlement company.


Q:   What happens if the underlying policy was obtained based on misrepresentations of health status?
A:   If a life insurance policy was obtained through fraud, the insurance company has two years to discover that fact. This is called the contestability period. If the company discovers the fraud, the company can cancel the policy. Investors who contemplate purchasing a viatical investment should be sure that the policies that are sold as investments are all beyond the contestability period.
Q:   What questions should I ask the person trying to sell me a viatical/life settlement?
A:  

Here are some questions that a prospective purchaser of a viatical settlement should ask: 

Have these securities been registered with the Division of Finance and Corporate Securities of the State of Oregon for sale in Oregon? Do not believe any seller who tells you that viaticals are not subject to the securities law.  

Is the salesperson a licensed broker/dealer? If not, is the salesperson exempt from licensing?  

Who are these sellers and how long have they been in business?  

Where is the business located?  

Who are the principals in the business?  

Have there ever been any complaints filed against the company or the principals with either state or federal securities regulators or lawsuits filed by other investors?  

Is a prospectus about the investment available from the company before you invest? If not, why?

Ask the seller to explain why this investment is appropriate for you. This analysis is especially important if you are a small investor or someone on a fixed income.  

If your insurance agent or your investment adviser have advised you to sell other investments or insurance products to purchase a viatical, ask why this is appropriate or advisable. Make sure you understand how investment in a viatical settlement meets your investment goals better than the securities or insurance you already have. Make sure you know if you will pay surrender charges or fees and how much they will be. Be especially suspicious if you are selling or surrendering instruments that currently receive beneficial tax treatment.  

Be certain that the insurance policy being invested in is outside the two-year contestability period. Contestable policies carry special risks.  

Will you be an owner of the policy or simply a beneficiary? Being a beneficiary but not an owner carries special risks. 

Ask if the policy being purchased is a group policy. Group policies carry special risks.  

Be careful about investing money from an IRA in a viatical contract. If the funds from the viatical are not available to you by age 70, you could be penalized by the IRS.  

How much commission does the salesperson receive for this sale? Is the amount of the fee reasonable?  

Be certain that all of the details about the policy and the seller's promises, guarantees and claims about the viatical and the underlying life insurance policy are in writing.

Most importantly, ask yourself how the loss of your principal, or the delay in having it returned, would affect your life and lifestyle. The seller cannot guarantee that your principal will be returned within the period promised by the seller. Guessing when anyone will die, even someone with a terminal illness, is inherently risky. Can you live with that risk?


Q:   Wouldn't an investment in a viatical be a good addition to my IRA?
A:  

Investing money from an individual retirement account (IRA) in a viatical settlement contract carries special risks. Internal Revenue Code section 408(a)(3) requires that "no part of trust (IRA) funds will be invested in life insurance contracts." This means that the Internal Revenue Service may not allow you the tax benefits of an IRA if you invest in a viatical settlement contract.  

Even if such an investment is allowed, you should carefully consider your age, the life expectancy of the viator, and the difficulty in predicting life expectancy before investing IRA funds in a viatical settlement contract. Since death benefits are not paid until the viator dies, you may encounter a problem taking annual distributions from your IRA that are mandatory beginning at age 70. If the funds are not available to take the mandatory distribution, you could be penalized by the IRS.