TAG | viatical settlement purchaser
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In an article about Florida Viaticals, in “The Florida Bar Journal” by Michael Cavendish, he writes, about 10 years ago, a new cottage industry sprang from the ranks of America’s venture capitalists. Some enterprising person noticed that certain well-to-do, terminal AIDS patients required medical treatment and living expenses after losing their jobs and employer-provided health insurance. Among these were people who were temporarily destitute but with current life insurance policies. Their dilemma was that the policy benefit was needed immediately for medical treatment, experimental cure drugs, or funds to provide a dignified existence, but the benefit funds would not be available until death–when they were no longer needed.
And into this difficult situation strode the venture capitalists, offering the sick insured a viatical settlement, an immediate lump sum cash payment in return for an assignment of the insured’s death benefit. The insured, or viator, was free to spend the cash as desired, and the investor assumed the responsibility of keeping the policy and the premiums current. The transaction seemed simple. The viator received cash when unemployable and uninsurable, and, upon the viator’s death, the investor collected the death benefit and, after subtracting the settlement amount, premiums, and administrative expenses, an attractive return. As the venture capitalists grew in sophistication and medical knowledge, they began to consider other types of terminal disease patients and elderly insureds as potential viators as well.
However, the viatical trade was unregulated, and even unknown in some areas of the country. Bad feelings arose over the industry’s perceived role as investors in the imminent demise of unfortunate, terminally ill, diseased persons. Allegations of insurance fraud arose in some quarters, and privacy concerns exploded as some firms began to take a comprehensive medical and mathematical interest in the gritty details of the health of aviator. Regulation continued to develop even when most people outside of the AIDS community and the fringe of venture capitalism had not heard of the practice of viatical settlements.
Florida, a demographic leader in AIDS patients and a state with a significant elder population, has taken significant steps to investigate and regulate the viatical trade. Florida’s Viatical Settlement Act, revised in 1999 by H.B. 2235, was drafted to regulate the brokers, financiers, and sales agents of the viatical business, and to protect both the viator and the nonprofessional investor from misrepresentations and nondisclosure of the risks of this still-evolving industry. This article examines Florida’s regulation of the young viatical industry and offers suggestions for promoting fair, protective viatical settlement regulations for Florida residents.
The viatical settlements are a 10-year-old investment industry built upon the mature life insurance policies of the old and terminally ill. Viatical investment firms buy life insurance policies at a discount, typically between 20 and 40 percent less than face value. The buyer takes over the payment of premiums from the insured and collects the insured’s death benefit upon the insured’s demise.
Viatical industry reputedly began when opportunistic venture capitalists began purchasing the life policies of endstage AIDS patients at a discount. The industry grew rapidly, brokering $90 million worth of life insurance benefits after its first year of existence. The growth has been geometric. One observer forecasted the viatical settlement market to reach $4 billion per year by this year.
The name viatical derives from the Latin viaticum–roughly translated meaning “provisions for a long journey.” Industry pundits claim that the viaticum was a package of money or food given to Roman soldiers before embarking on a perilous campaign.
How Viaticals Work
Typically, in viatical settlement transactions, the insured (viator) agrees to sell and assign his or her life insurance policy through a broker to an investment firm. The investment firm may then bundle a number of policies together and resell them in fractions to dozens of individual investors, much like a REIT or a mortgage-backed security. The investment firm may also sell an individual policy or a fraction of an individual policy to a single investor, tying that investor’s return directly to the life expectancy of a single viator.
* Benefits to the Viator
The viatical settlements are slowly gaining recognition as an often helpful money management alternative for the very sick and very old, partly because of the favorable tax treatment for viatical settlements laid out in the Health Insurance Portability and Accountability Act of 1996. Viatical settlements are expressly excluded from the terminally ill viator’s gross income for tax purposes because they are technically considered payments rendered by reason of death.
By avoiding the payment of taxes, viators can finance additional medical care and meet living expenses for a longer period. The generous tax treatment, allowing viators to retain 100 percent of their settlement, is predicted to lead to increased life insurance sales, as more healthy individuals learn that they can viaticate their policies in the event of a terminal illness. This tax treatment may change in the future, however, as viatical settlements become more commonplace and greater volumes of money move through them.
* Benefits to the Investor
Investing in viaticals is increasingly commonplace in the United States. An active secondary market for viatical settlements has developed, and most anyone can now invest in viaticals through a network of independent financial planners and life insurance agents. Viaticals have not been labeled as more lucrative, safer, or riskier than traditional debt, equity, and real estate investments, but they are undoubtedly based upon an entirely different calculus than those traditional investments. Viaticals, for instance, are immune to interest rate concerns and economic growth or stagnation. For this reason, some investors may prefer viaticals to traditional modes of investment.
* Expansion of the Market
The viatical investment firms are now branching out beyond AIDS patients and those with terminal diseases. Firms are considering persons with maladies such as cancer and heart disease as a larger potential market. Viatical calculations are based on mortality rates and patient-specific medical diagnoses, so, theoretically, an investment firm could offer a viatical settlement to anyone with an assignable life insurance policy, so long as the firm can reasonably predict the viator’s life expectancy.
Business “key man” policies may become a popular target for viatical investors.Key man policies are sold widely to small and medium-sized businesses which depend upon the knowledge or contacts of an executive or owner to continue to flourish. Sometimes the key man becomes less critical to the business in a financial sense because the aptitudes of other executives or employees have improved or because the key man wishes to retire. Instead of allowing the policy to lapse or converting to an expensive life policy, some businesses may view a lump sum viatical settlement as an effective way to recapture amounts spent on premiums over the years. Again, the prospects of receiving an offer from a viatical investment firm depend largely on the health and age of the insured.
The recent upswing in sales of term life insurance policies can turn even healthy elderly persons into attractive viatical candidates. New growth in viatical investing flows toward wealthy elderly persons with jumbo life policies of a half-million dollars or more. These new jumbo viaticals, sometimes called “high net worth transactions” or “senior settlements,” are touted as a form of estate planning to healthy older individuals who may willingly sacrifice a death benefit which is no longer needed to bear an estate tax burden, or who do not want to continue tying up their cash in high insurance premiums. Caution is called for, however, as the healthy high net worth individual or key man may not qualify for the same favorable tax treatment that HIPAA affords to terminally ill and diseased viators.
Partly in response to the growth of the viatical industry, traditional life insurance companies have been offering accelerated benefit payouts or “living settlements” to certain terminally ill insureds. Accelerated benefit programs are popular with insurers who can cut their death benefit expenses by the amount of the payout reduction. While a handful of insurers will pay a terminally ill insured between 90 and 95 percent of the death benefit, most insurers pay settlements comparable to those offered by viatical investment firms, and many insurance companies have strict criteria for accelerated benefit applicants, usually a life expectancy of between six months and one year, confirmed by the insurer’s experts.
Some employer-sponsored group life policies can be viaticated, although this option is not often disclosed to employees in their benefits manuals. The availability of viatication as an option to terminally ill group life policy holders will depend upon restrictions built into the policy, such as assignability and contestability clauses.
* Policy Concerns
For the viator, privacy has become an issue in viatical settlements. At least one Florida court has questioned whether viators have a continuing right of privacy in their medical records once their health becomes an essential element of a commercial transaction. Florida’s Insurance Code provides that once the viator’s records are held by a licensee, they are subject to review by the Department of Insurance.Whether those records can properly be disclosed to a private third party remains unresolved.
For viatical investors, risk and remorse are two common concerns, one financial and one emotional. First, the experts agree that viaticals are a risky investment. An investor cannot recover his or her investment until the death of the viator, making it problematic for the investor to get to cash when needed. There is a secondary market and the resale of a viatical is possible in theory, but in practice there may be few buyers for a viatical investment which has lost value because the viator has recovered or is outliving the prognosis.
Second, from an emotional standpoint, viaticals are not an appropriate investment for many people. Without mincing words, viatical investors collect when their viator dies. Worse yet, the sooner death occurs, the larger the investor’s return. These feelings can be overcome, and the viatical settlement can operate as a compassionate and humanitarian investment in the case of a truly terminally ill person in dire need of money to pay the rent. To that effect, some viatical investment firms claim that most viators are grateful to receive cash settlements of their life policies. Nevertheless, those who invest in viaticals repeatedly will sooner or later find their nest egg uncomfortably subject to a sick person who exceeds his or her life expectancy, an unthinkable situation for most people that leads some viatical investors to feelings of remorse and thoughts of rescinding the investment contract, which is usually not an option.
While solutions for privacy and remorse are difficult to legislate, in answer to investor and viator education concerns, the National Association of Insurance Commissioners in 1993-94 promulgated a Model Act and a Model Regulation on viatical settlement contracts. Florida’s regulatory scheme for viatical settlements closely resembles the NAIC’s Model Act in many respects.
Florida regulates viatical settlements with an eye toward the insured, the ultimate investor, and the middlemen. The Viatical Settlement Act defines the various parties involved in a viatical transaction as follows:
The viator is an insured with a catastrophic or life-threatening illness who enters into a viatical settlement contract.
The viatical settlement broker is one who, on behalf of aviator for a fee or commission, offers or attempts to negotiate viatical settlement contracts between a Florida viator and one or more investment firms, called viatical settlement providers. Brokers typically work closely with viators and collect their commissions from providers after the contract has been executed.
The viatical settlement provider is defined as a person who, in or from Florida, effectuates a viatical settlement contract. Banks, life and health insurers, natural persons who enter into no more than one viatical settlement contract per year, and trusts created to hold viatical contracts are excepted from this definition.Providers are usually the viatical investment firms, progeny of the original venture capitalists, who buy large numbers of life policies and resell them to investors, called viatical settlement purchasers.
The viatical settlement sales agent is a person other than the provider who arranges the purchase, through a viatical settlement purchase agreement, of a life insurance policy or an interest in a life insurance policy. According to representatives at the Florida Department of Insurance, any person referring or soliciting the sale of a viatical investment who collects a fee or commission qualifies to be labeled as a sales agent.
The viatical settlement purchaser is defined as a person, other than a broker or provider, an accredited investor under Rule 501, Regulation D of the Securities Act Rules, or a qualified institutional buyer under Rule 144(a) of the 1933 Securities Act, who gives a sum of money as consideration for a life insurance policy for the purpose of deriving an economic benefit. This typically is the investor or ultimate purchaser.
The act defines a viatical settlement contract as one in which the provider pays compensation or value to the viator in an amount less than the expected death benefit of the subject insurance policy, and the viator in return assigns, transfers, sells, devises, or bequeaths ownership of all or a portion of the subject insurance policy to the provider. The contract can also include a loan secured primarily by a life insurance policy, or a loan secured by the cash value of the policy, excepting loans made by life insurers to insureds under the guidelines of the subject policy.
A viatical settlement purchase agreement is defined as a contract between a purchaser and a party other than the viator to purchase an interest in a life insurance policy. This is usually the investment contract between the purchaser and the provider.
The basic regulatory mechanism of the act is licensure. Brokers, providers, and sales agents are expressly subject to specific licensure requirements. Brokers must submit fingerprints, organizational documents, and sworn biographical statements, and must undergo a background check before receiving a license. Providers also must submit fingerprints and organizational documents and must undergo a background check as a prerequisite to licensure. Additionally, providers must meet a minimum trust deposit requirement of $100,000 with the Department of Insurance. Sales agents must hold valid life insurance agent licenses as defined in [sections] 626.051 of the Florida Insurance Code.
The act provides safeguards for the viators and purchasers who deal with brokers, providers, and sales agents. For example, brokers must disclose to viators the amount of the broker’s compensation and the method used in determining compensation. In addition, providers may not enter into contracts with viators whose policies provide accelerated death benefits in amounts and with prerequisites equal to those offered by the provider, unless the viator’s insurer denies a request to release the accelerated death benefit in writing, or does not respond to such a request within 30 days of receipt. Viators may also rescind a viatical settlement contract within 15 days after receipt of the settlement proceeds, contingent upon return of the proceeds.
The provider must inform the viator of the following: that there are alternatives to viatical settlements, including accelerated death benefits offered by the viator’s insurer; that proceeds of the settlement may be taxable; that proceeds of the settlement could be subject to the claims of creditors; and that the viator’s receipt of the settlement sum could adversely affect the viator’s eligibility for Medicaid or other government benefits.
Moreover, the act provides for the use of independent escrow agents for the simultaneous delivery of contract documents and settlement funds. This last protection reduces much of the viator’s transaction risk and results in orderly, real estate style settlement closings.
For purchasers, the act provides for the following mandatory disclosures to be made by providers and sales agents, among others: that the represented return of the investment is directly tied to the lifespan of one or more insureds; that the projected life span of the insureds is tied to the return, if a return is represented; that the investor shall be responsible for the payment of insurance premiums on the policy, late fees, surrender fees, and other costs, if required by the terms of the viatical contract; that the life expectancy and rate of return are only estimates and cannot be guaranteed; and that the viatical investment should not be considered a liquid purchase, since it is impossible to predict the exact timing of its maturity and the funds may not be available until the death of the insured. Furthermore, providers and sales agents are expressly prohibited from misrepresenting the nature of the viatical transaction, the expected return, or that the return is guaranteed by any government authority, which it is not.
Florida’s Viatical Settlement Act represents an attempt to regulate the viatical trade through strict licensure of brokers, providers, and sales agents, while mandating specific disclosures for the benefit of purchasers and viators. The act is modeled after the NAIC’s model act on viatical settlements and is thus uniform in many respects to viatical regulations in other states. The intended cumulative effect of the act appears to be a baseline standard of public education and protection, a goal somewhat similar to the policy underlying the regulation of investment securities.
This article appeared in the Florida Bar Journal.
If you have lost money on a viatical settlement, call a Securities Arbitration Lawyer for a free consultation on how to recover your losses. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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