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Gambling on Death – Life Settlements and Viaticals

by Ryan Guina

If there is a way to make a buck, someone will find it. Even if it means dealing in death. No, I’m not talking about being a hired gun – I’m referring to dealing in viatical settlements and life settlements, which is basically gambling on death. A viatical settlement or life settlement is selling a life insurance policy to a third party for less than face value and naming the buyer as the beneficiary; the buyer then waits for the policy holder to die to collect the policy. This is not a topic that is easy for everyone to read about, but these products may serve a purpose in certain situations. Let’s take a look at these from the perspective of both the sellers (policy holder) and the buyers (investors).

Life Settlements and Viatical Settlements

In its simplest form, a viatical settlement or life settlement is simply the sale of a life insurance policy to a third party. Generally, such transactions involve policies of high value such as a face amount of $250,000 or more. But there is a slight twist – the policy holders who are selling their life insurance policies are generally knocking at death’s door. Think, for example, of someone with a terminal illness, or and elderly person in poor health. It was these situations that brought about a secondary market for life insurance – enter viatical and life settlements.

Viatical Settlements

In general, a viatical settlement is the term given to someone who buys or sells a life insurance policy when the insured has less than a 2 year life expectancy. Viatical settlements gained popularity in the early 1980s when AIDS became well known as a disease that brought death relatively quickly. Some AIDS patients sold their life insurance policies for less than face value in order to afford to pay their medical bills. Then the industry spread to include other patients with terminal illnesses, such as cancer. Viatical settlements give terminal patients the opportunity to use their life insurance money before they pass, to help them pay their medical bills or other financial needs.

How does it work? Investors who are buying these life insurance policies aren’t running a charity – they are in this to make money. They want to ensure they will receive a good return on their investment. Due to the nature of the viatical settlement, the investors will require a review of the seller’s medical records to ensure the seller truly is a terminal patient and isn’t expected to have a long window to live. They may require several doctors to review the medical records, then input the data into actuarial charts to determine how long the patient is expected to live. Then they make an offer that will give them a generous expected return on investment based on their offer and the patient’s life expectancy.

How much are viatical settlements worth? Terms vary, but an example would be an investor buying a life insurance policy for a terminal patient for half of face value, being named the beneficiary of the plan, then receiving the benefits when the policy holder passes away.

What is a life settlement?

A life settlement is similar to a viatical settlement, but it is usually for someone who is elderly and doesn’t have a terminal illness. Basically a life settlement gives the bearer (the insured) the potential to sell off his or her life insurance policy and collect the cash. The insured will list the policy for sale and a cash buyer will come along and purchase the policy, giving the insured the amount agreed upon. The amount agreed upon is often less much less than face value.

Who benefits from a viatical or life settlement?

Both viatical settlements and life settlements seem like win-win situations for the buyers and the sellers – the buyer gets a chance to quickly double his money (or at least make a nice return on investment) and the seller gets to tap into his life insurance money early to pay medical bills or take care of other needs – which can be a huge benefit if their medical bills are expected to exceed their net worth.

But this ignores the fact that most people don’t ever get to see their life insurance money, since it goes to their beneficiaries – who really become the losers in this situation as they won’t be able to receive the life insurance proceeds they might have been in line to receive.

What is the risk with a viatical or life settlement?

Viaticals and life settlements aren’t without risk, and they aren’t always win-win. For example, investors could buy a viatical settlement for a terminal cancer patient who has a life expectancy of 12 months. The investor offers the policy holder $500,000 cash on a $1,000,000 policy, hoping to profit $500,000 in 12 months or so. But they might not recover their investment for a long time if the policy holder makes a miraculous recovery. The investor will eventually get the full payout of the life insurance policy, but it might be several years down the road and not turn out to be a great investment in the long run.

The same situation can happen with life settlements, which are usually for elderly life insurance holders. These policies are always checked against actuarial tables before they are purchased, and the investors almost always review medical records to guesstimate how long someone will live after they sell their life insurance policy. But even some 80 year old smokers with poor health history can live to be 90.

More Risks – Gambling on Death, Sketchy Regulations and Fraud

Life settlements and viaticals are risky for other reasons. As an investor, you are essentially gambling on death. There is still risk, even when many policies are sold bundled together. When will the person die? Will it be quickly enough to receive a good return on investment? Here is a more in depth look at these investments: An Actuarial Perspective on the Life Settlement Market.

This market has also seen a lot of exposure to fraud and misrepresentation as some dealers in viatical and life settlements misrepresent the expected returns (or simply misrepresent ownership of the investment). There are also no recognized national standards for viatical or life settlement investments, and only 23 states regulate the investments at this time. More information on viaticals fraud.

Should you sell your life insurance policy to a viatical or life settlement investor?

Selling a life insurance policy is generally a better deal for someone who has no living relatives – otherwise you are opening your family to potential bad will and potentially expose your estate to lawsuits. There is an emotional minefield to navigate – if you do have living relatives, you might wish to first seek their counsel regarding the situation.

Tax consequences. Additionally, the insured would be required to pay taxes on the large lump sum of money they receive upon sale of their life insurance policy. Life insurance benefits are generally tax exempt, but in this case you would be selling a policy, not receiving a life insurance settlement (the new policy holders, however, would be receiving a life insurance settlement).

So instead of your beneficiaries receiving a $1,000,000 tax free payout when you pass away, you might receive half of that up front which would be taxable.

Depending upon your personal situation, a life settlement can be a good thing to help improve your remaining time. Or it could be a bad deal that causes ill will between you and your family, making your remaining time less enjoyable. Be sure to consider all possibilities prior to making a decision about buying or selling a life settlement. Here are some tips on selling a life insurance policy from The Wall Street Journal.

Life settlements and viaticals are not evil

This is uncomfortable topic for many people to think about, much less entertain the idea of selling their life insurance policy, or invest in death. But the fact remains that viaticals and life settlements can offer some people some needed cash to take care of medical bills or otherwise enjoy the time they have left on earth. As an investment, it can offer attractive returns.

However, these settlements probably aren’t right for the majority of people out there – either as a buyer or a seller. Do your due diligence and research potential investments and companies offering to buy or sell your these instruments before you act on either an investment or selling your life insurance policy.

What are your thoughts on life settlements or viatical settlements?


Published or updated January 6, 2011.
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{ 11 comments… read them below or add one }

1 The College Investor

My grandfather (who is 85) had a term life insurance policy that was set to end in two years. It was a $500,000 policy. He was offered $350,000 to sell it, and he took it. He pocketed the money, and has since outlived the term (so the people who bought it got nothing).

He liked the idea because he didn’t need it for his beneficiaries any longer (it was a 30 year policy, and it was more valuable to him earlier in life). He pocketed a nice chuck of change, and he will probably pass that along to his heirs anyway.

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2 Ryan

Thanks for sharing – that sounds like a very interesting situation. And it seems like he got a great deal – and those “investors” were truly gambling in his situation.

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3 jim

oh my god> What a remedial view of the industry. The truth of the matter is is that the biggest supporters of the industry are the sellers themselves. In many cases the sellers have multiple policies and sell one and keep the rest. in other cases it’s sell the policy or lose your home. What would you do? The author fails to realize that everyone makes money off of death to include the funeral home , caterer, florist, grave stone maker, cemetary, hole digger, printers, but none help them when they are alive financially. the other fact is that a lot of these policies would lapse because the illness causes loss of income and the premiums can no longer be paid. The insurance companies love to cancel policies right before someone dies.

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4 Jacquelyn

oh my god> did we read the same article? All the author wrote was an explanation of what these investments are and how people can benefit from them. The only personal touch was that he said it wasn’t for him. Do you sell these viaticals, jim?

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5 Ryan

Thanks for your comment. I understand your view of the industry – and it is in line with what I would expect from someone who is in the industry. As for myself, I simply stated it was not an investment for me, and that others should do their due diligence before investing or selling. There are many ethical people involved in this industry, but there are also many cases of fraud within this industry.

Life settlements and viaticals aren’t the most well known investment opportunities around, so I thought I would take this opportunity to share a brief over view with my readers. The simple truth is that this is not an easy topic for most people to think about and there are many issues to consider. As these are often personal in nature and unique to the person or family, there is no way to list them all within the scope of a single article. That said, I appreciate you taking the time to leave a comment.

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6 krantcents

Viaticals and Life Settlements have their place! Purchasing one is definitely a bet and I know I don’t feel comfortable doing it. Maybe because I don’t need the money, I feel this way.

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7 Ryan

I agree, krantcents – they have their place, but they aren’t for me. I would rather invest elsewhere! :)

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8 Lenny Robbins

As a life insurance agent, I have never seen an issue that has more emotion attached to it’s view, either positive or negative. Your article is excellent and certainly gives a prospective seller some food for thought.
Although I have never participated in a settlement, I believe there are certain situations that make sense, especially in a buy-sell where the need for coverage no longer exists, the insureds are healthy and relatively young.

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9 Kirk Kinder

Viaticals are a legitimate investment vehicle. It can be a solid investment to the investor and a lifeline to those who need money. Personally, I couldn’t invest in them as I would never want to “root” for someone to die early so I could maximize my return.

I was amazed to read the College Investor’s post. Not sure why investors would ever invest in a term policy as it will end at some point. At least with a permanent policy, you will get some sort of payment even if the insured lives beyond the actuarial projections. Good for your Grandfather. I hope he continues to outlive the estimates.

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10 Ryan

Kirk, I agree, it’s a legitimate investment vehicle, but like you, I don’t think it’s an investment I am interested in. The other concern I have is the number of fraud cases I’ve read about. I’m not trying to slam the industry – far from it. But this is an area where the average investor isn’t well schooled, so some extra research would be warranted before making an investment.

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11 The Jarhead

Let’s just do a death pool. HAHA Actually I am just kidding on that as that is truly gambling on death.

What I get from the article is that it has its place and can definitely work to the benefit of all.

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