Viaticles or Life Insurance Buyouts

Viaticals and life insurance buyouts (also known as life settlements) are forms of investing where an investor purchases an individual’s life insurance policy at a discount, continuing to pay the premiums, and ultimately collecting the death benefit when the insured person passes away. These investments can offer high returns but come with significant ethical considerations and risks.

Viatical Settlements:

A viatical settlement is the sale of a life insurance policy by a terminally ill individual (with a life expectancy typically less than two years) to a third party (the investor) for a lump sum of cash. The investor takes over the policy, pays the remaining premiums, and collects the death benefit when the original policyholder dies.

How Viatical Settlements Work:

1. Policyholder Sells the Policy:
   • A terminally ill policyholder, often in need of cash for medical bills or end-of-life expenses, sells their life insurance policy to a third party (an individual investor, investment group, or viatical settlement company) for a lump sum that is less than the policy’s death benefit but more than the cash surrender value.
2. Investor Becomes the Beneficiary:
   • The buyer (investor) becomes the beneficiary of the life insurance policy and is responsible for paying the remaining premiums on the policy until the insured passes away.
3. Collection of Death Benefit:
   • When the insured person dies, the investor collects the full death benefit from the insurance company. The difference between the purchase price, the premiums paid, and the death benefit represents the investor’s profit.

Benefits of Viatical Settlements:

• Potential for High Returns: Viatical settlements can offer high returns, especially when the life expectancy of the insured is short. The payout to the investor is typically much greater than the initial purchase price of the policy.
• Diversification: Viaticals are often uncorrelated to traditional market investments (like stocks and bonds), offering a way to diversify a portfolio.
• Benefit for Policyholder: For the policyholder, it provides a way to receive immediate cash during a difficult time, which can be used for medical care, living expenses, or other needs.

Risks of Viatical Settlements:

• Longevity Risk: The primary risk to investors is that the insured individual lives longer than expected, leading to additional premium payments and a delayed payout. This can significantly reduce the overall return on investment.
• Ethical Concerns: There are ethical considerations, as the investor profits from another person’s death. For some, this creates discomfort or moral conflict.
• Regulatory Risk: Viaticals are subject to varying degrees of regulation depending on the jurisdiction. Some areas may have more stringent rules governing the industry to protect both policyholders and investors from fraudulent practices.
• Liquidity Risk: Viaticals are generally illiquid investments. Investors must wait for the insured to pass away to collect the death benefit, which could take years.

Life Settlements (Insurance Buyouts):

A life settlement is similar to a viatical settlement, but it typically involves selling a life insurance policy where the insured is not terminally ill but may be elderly or in declining health. The insured’s life expectancy in a life settlement is usually longer than in a viatical settlement, generally ranging from 2 to 15 years.

How Life Settlements Work:

1. Policyholder Sells the Policy:
   • The policyholder, often an elderly person who no longer needs the life insurance policy or can no longer afford the premiums, sells the policy to an investor for a lump sum. This payment is usually more than the policy’s cash surrender value but less than the death benefit.
2. Investor Takes Over:
   • The investor takes over the policy and assumes responsibility for paying the premiums.
3. Investor Collects Death Benefit:
   • When the insured person dies, the investor collects the death benefit from the insurance company.

Benefits of Life Settlements:

• Higher Cash Payout for Policyholders: For policyholders who no longer need or can afford their life insurance, life settlements offer an opportunity to liquidate the policy for more than the cash surrender value.
• Potentially Attractive Returns for Investors: Life settlements can offer attractive returns to investors, particularly when the insured has a shorter life expectancy.

Risks of Life Settlements:

• Longevity Risk: As with viatical settlements, life settlements carry the risk that the insured individual will live longer than expected, causing higher costs and delayed returns.
• Premium Payment Risk: Investors are responsible for paying premiums until the insured passes away. If the insured lives much longer than anticipated, the premiums could become financially burdensome, eroding the investment’s profitability.
• Regulatory Risk: Life settlements are more regulated than viaticals in many places, but they still carry risks associated with potential fraud or mismanagement by the entities involved in the settlement process.
• Illiquidity: Like viaticals, life settlements are illiquid investments. It may take many years before the death benefit is paid out, locking up the investor’s capital for an extended period.

Differences Between Viaticals and Life Settlements:

• Health of the Insured: Viatical settlements involve terminally ill policyholders, while life settlements involve elderly but not necessarily terminally ill individuals.
• Life Expectancy: In viaticals, the life expectancy of the insured is typically less than two years, while in life settlements, it can range from 2 to 15 years.
• Regulation: Viaticals tend to be more controversial and may be less regulated than life settlements, which are increasingly subject to more oversight.

How to Invest in Viaticals or Life Settlements:

1. Direct Purchase: Individual investors can buy viatical or life settlement policies directly from brokers or settlement companies. This method requires substantial due diligence to assess the policy, the insured’s health, and the potential costs and returns.
2. Funds and Pooled Investments: Investors can also invest in pooled life settlement funds. These funds aggregate multiple life insurance policies, spreading out risk across several policies and policyholders. Life settlement funds are often managed by professional fund managers who handle the due diligence, premium payments, and other logistics.
3. Platforms and Marketplaces: Online platforms have emerged that facilitate the buying and selling of life settlements and viaticals. These platforms help match investors with sellers, streamlining the process for both parties.

Important Considerations:

• Due Diligence: Thorough due diligence is critical in this type of investment. This includes understanding the policy terms, the insurance company’s financial strength, the insured’s health, and the expected premium payments over time.
• Taxation: The tax treatment of viaticals and life settlements can be complex. Investors should seek advice from tax professionals to understand the implications of their investment.
• Regulation: Ensure that the settlement company or broker is properly licensed and adheres to the regulations governing life settlements and viaticals in your jurisdiction.
• Ethics and Morality: Some investors may be uncomfortable profiting from an investment tied to someone’s death. It’s important to consider personal values and ethics before entering this market.

Conclusion:

Viatical and life settlement investing can offer attractive returns, often uncorrelated with traditional markets. However, they carry significant risks, including the possibility that the insured will live longer than anticipated, leading to additional premium payments and delayed payouts. Thorough due diligence, careful consideration of longevity risk, and a solid understanding of the policy details are crucial for success in this niche investment field. Additionally, investors should weigh the ethical implications and personal comfort with investing in policies linked to mortality.