Insurance for Sale

Viatical settlements provide patients with much-needed cash, but the practice can be risky.

By Jo Cavallo

In 1999, Bob Friedman, 73, was told he had five years to live. Diagnosed with both bladder and prostate cancers, Friedman was going to let his two life insurance policies lapse because he no longer wanted to pay the hefty premiums. “As I got older, I did a little arithmetic and it just didn’t pay to keep the two policies,” says Friedman. “I was going to drop them and I spoke to my insurance agent who suggested instead of just dropping them, why not sell them to a viatical broker? So, that’s what I did.”

Even though Friedman was paid a fraction of what the policies are worth—just $102,000 for the two policies valued at $300,000—because of his longer life expectancy, he is happy with the settlement he received. His wife, Joy, however, is uneasy about the arrangement because, “she felt that somebody’s going to be wishing me dead,” says Friedman. And, basically, that is the premise viatical settlement companies count on to make a profit.

Viatical companies began appearing in 1989 in response to the AIDS epidemic. And initially the partnership agreement seemed advantageous for both the viator (someone who cashes in his policy) and the new breed of companies called viaticals (from the Latin word viaticum, meaning provisions for a journey). AIDS patients with a short life expectancy—two years or less—could sell their policies at a reduced rate to pay for their increasing medical care, and the buyout companies could realize a quick return on their investment by redeeming the full value of the policies once the patients died.

But left unregulated by the federal government, the industry has been plagued by complaints of fraud and mounting ethical issues over the ensuing years.
“If someone is dying and needs the money, a viatical settlement can be a good thing, even though he may get less than 50 percent of the policy’s worth,” says Gloria Glening Wolk, a consumer advocate and author of Cash for the Final Days. “There are a lot of expenses not covered under health insurance, or there may be other expenses to consider like the mortgage payment, so if a family loses $50,000 on a $100,000 life insurance policy, it may still be worth it. But there are companies that don’t treat people ethically. And although most states now have viatical statutes ostensibly to protect the viator, not a single state has ever enforced them.”

Insufficient consumer protection has left viators with little or no recourse when they haven’t been paid the buyout amount promised by the settlement agent or they haven’t been paid on time. “Most people don’t do any homework [before selling their life insurance policy]. If they’re lucky, everything goes well but if not that’s when they contact me,” says Wolk, who advises people looking to sell their life insurance policies.

Investors involved in viatical buyouts can get stung too. Often a viatical agent will sell fractional interests of the viator’s policy to investors, who then become co-owners of the policy benefit. The investors pay the premiums, and when the insured person dies, they collect the benefit. But new medical breakthroughs are allowing patients to live years beyond their initial diagnosis, reducing or even eliminating investor profit.

As Friedman’s experience shows, viactical settlements can be legitimate enterprises with positive outcomes. But since the industry is relatively new and still largely unregulated—only 36 states have some viatical protection—experts warn patients to use caution if they are contemplating selling their life insurance policy. “Only sell to a licensed viatical broker, preferably one who resides in the patient’s home state,” advises Wolk. “If the patient lives in a state without a viatical law, find someone who’s licensed in one of the states with licensing laws such as New York, California and Florida.”

Newer types of viatical arrangements (see sidebar) include life insurance settlements in which healthy elderly people with large policies they no longer need are able to convert them to cash. And a viatical variation allows cancer patients and their families to establish a line of credit against the face value of their life insurance policies at reasonable rates.

For more information about viatical settlements, visit Gloria Glening Wolk’s website at www.viatical-expert.net.