Viatical settlement
Encyclopedia
A viatical settlement is the sale of a life insurance
policy by the policy
owner before the policy matures. Such a sale, at a price discounted from the face amount of the policy but usually in excess of the premiums paid or current cash surrender value
, provides the seller an immediate cash settlement. Generally, viatical settlements involve insured individuals with a shorter life expectancy. It is a practical way to pay extremely high health insurance premiums that severely ill people with short life expectancy (ex. a person with AIDS) face. A life settlement
is a similar transaction but involves insureds with longer life expectancies.
From the perspective of the investor, purchasing a viatical settlement is similar to buying a zero coupon bond
with an uncertain maturity date. The return depends on the seller's life expectancy and when he or she dies.
Viatical settlements grew in popularity in the United States
in the late 1980s, when the AIDS
epidemic peaked. The early victims of AIDS in the U.S. were largely gay men, many of whom were not particularly old. They often had no wives or children (the traditional dependents in a life insurance policy), but they had life insurance policies through employment or due to other investment activity. The dependents on the policies were often their parents who did not need the money. Viatical settlements offered a way to extract value from the policy while the policyholder was still alive.
At the time, the AIDS mortality rate was very high, and life expectancy after diagnosis was typically short. Investors were reasonably sure that they would collect in a relatively short time. This combination of events caused a surge in viatical settlements as both investors and viators saw an opportunity for mutual benefit.
Viatical settlements eventually developed a bad reputation in the investing community. The companies that purchased them from policy holders typically resold them to individual investors. Salespeople were paid large commissions to push the settlements, which were not conventional investments and which were misunderstood by many investors. The government regulatory agencies had little experience and few regulations dealing with viatical settlements, and the industry attracted some unscrupulous dealers.
Despite the bad experience of some investors, viatical settlements remain an often valuable tool for the personal financial management of many ill people. A 2002 study showed that among hospice financial counselors who have had experience with viatical settlements, most report positive experiences.
. Lombardi is now serving a 20-year prison sentence.
In August 2008, Michael S. Pasano, attorney for Stephen L. Keller, the former CEO of Kelco Inc. filed a motion in the United States District Court For The Eastern District of Kentucky, with Judge Karl S. Forester, to dismiss Keller’s convictions for conspiracy, fraud and money laundering. Keller’s convictions resulted from Kelco purchasing life insurance policies from HIV/AIDS patients who lied on their applications. While Kelco’s actions were not illegal, the patients committed fraud in obtaining these policies. The burden falls on the insurance companies to exercise due diligence and to properly evaluate applicants before issuing a policy. Two appellate courts have affirmed through the McCarran-Ferguson Act that states and not the Federal Government have jurisdiction over regulation of viatical settlement companies and the insurance industry. Because Kelco operated within the bounds of Kentucky law, no crime was committed, and Keller has yet to receive a decision on his motion.
Two landmark appellate cases back up Keller’s motion. The crucial intervening case was a 2006 decision of the Fourth Circuit Court of Appeals in Life Partners, Inc. v. Morrison. The appellate court ruled that Virginia's Viatical Settlements Act, a direct analogue of Kentucky's Act, derived from the same model law came within the scope of the McCarran-Ferguson Act. The Fourth Circuit held that “the viatical settlement is not collateral to the life insurance policy. Rather, it modifies it, changing the parties' obligations and benefits, while yet leaving the insurance i.e., the transfer of the specific risk in place. At its essence, a viatical settlement is transaction that fractures the two-part insurance contract between the insurer and the insured and creates a new tripartite arrangement among the insurer, the insured, and the insured's assignee the viatical settlement provider. All of these matters, and more, regulated by the Virginia Viatical Settlements Act surely "relate to" the business of insurance in that they regulate the new ordering of the tripartite insurance arrangement involving the insurer, the insured, and the viatical settlement provider.”
The Fourth Circuit's holding was reinforced by the consonant decision of the Northern District of Georgia in National Viatical, Inc. v. Oxendine, which was affirmed on appeal by the Eleventh Circuit in 2007. The court determined that the McCarran-Ferguson Act applied to Georgia's implementation of the Model Life Settlement Act, the model upon which the Kentucky Viatical Act was based is a precursor of the Life Settlement Act.
Two appellate courts have handed down decisions which should exonerate Keller yet Circuit Judge Karl S. Forester, the judge who has presided over the case through its inception, has yet to rule on Keller’s motion. Forester ironically approved the forfeiture of Kelco-owned policies that were fraudulently-obtained by HIV/AIDS patients. The Government ultimately resold the policies on the living patients and collected death benefits on the deceased patients.
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
policy by the policy
Insurance contract
In insurance, the insurance policy is a contract between the insurer and the insured, known as the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for payment, known as the premium, the insurer pays for damages to the insured which are caused by...
owner before the policy matures. Such a sale, at a price discounted from the face amount of the policy but usually in excess of the premiums paid or current cash surrender value
Cash surrender value
The sum of money an insurance company will pay to the policyholder or annuity holder in the event his or her policy is voluntarily terminated before its maturity or the insured event occurs. This cash value is the savings component of most permanent life insurance policies, particularly whole life...
, provides the seller an immediate cash settlement. Generally, viatical settlements involve insured individuals with a shorter life expectancy. It is a practical way to pay extremely high health insurance premiums that severely ill people with short life expectancy (ex. a person with AIDS) face. A life settlement
Life settlement
A life settlement is a financial transaction in which the owner of a life insurance policysells an unneeded policy to a third party for more than its cash value and less than its face value. Until recently, if a policyowner opted out of a policy by surrendering the policy or allowing it to lapse,...
is a similar transaction but involves insureds with longer life expectancies.
From the perspective of the investor, purchasing a viatical settlement is similar to buying a zero coupon bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
with an uncertain maturity date. The return depends on the seller's life expectancy and when he or she dies.
Viatical settlements grew in popularity in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
in the late 1980s, when the AIDS
AIDS
Acquired immune deficiency syndrome or acquired immunodeficiency syndrome is a disease of the human immune system caused by the human immunodeficiency virus...
epidemic peaked. The early victims of AIDS in the U.S. were largely gay men, many of whom were not particularly old. They often had no wives or children (the traditional dependents in a life insurance policy), but they had life insurance policies through employment or due to other investment activity. The dependents on the policies were often their parents who did not need the money. Viatical settlements offered a way to extract value from the policy while the policyholder was still alive.
At the time, the AIDS mortality rate was very high, and life expectancy after diagnosis was typically short. Investors were reasonably sure that they would collect in a relatively short time. This combination of events caused a surge in viatical settlements as both investors and viators saw an opportunity for mutual benefit.
Viatical settlements eventually developed a bad reputation in the investing community. The companies that purchased them from policy holders typically resold them to individual investors. Salespeople were paid large commissions to push the settlements, which were not conventional investments and which were misunderstood by many investors. The government regulatory agencies had little experience and few regulations dealing with viatical settlements, and the industry attracted some unscrupulous dealers.
Despite the bad experience of some investors, viatical settlements remain an often valuable tool for the personal financial management of many ill people. A 2002 study showed that among hospice financial counselors who have had experience with viatical settlements, most report positive experiences.
Mutual Benefits
One of the most infamous viaticals cases involved the Mutual Benefits company headed by Peter Lombardi in Florida which had 28,000 investors and had focused in the paying HIV clients. In 2003 the Securities Exchange Commission closed the firm saying it was involved in a $1 billion Ponzi schemePonzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
. Lombardi is now serving a 20-year prison sentence.
Kelco
In another high profile case, Kelco, Inc., a viatical settlement company once based in Lexington, KY has been at the center of a 10 year long legal battle involving insurance giants such as AIG.In August 2008, Michael S. Pasano, attorney for Stephen L. Keller, the former CEO of Kelco Inc. filed a motion in the United States District Court For The Eastern District of Kentucky, with Judge Karl S. Forester, to dismiss Keller’s convictions for conspiracy, fraud and money laundering. Keller’s convictions resulted from Kelco purchasing life insurance policies from HIV/AIDS patients who lied on their applications. While Kelco’s actions were not illegal, the patients committed fraud in obtaining these policies. The burden falls on the insurance companies to exercise due diligence and to properly evaluate applicants before issuing a policy. Two appellate courts have affirmed through the McCarran-Ferguson Act that states and not the Federal Government have jurisdiction over regulation of viatical settlement companies and the insurance industry. Because Kelco operated within the bounds of Kentucky law, no crime was committed, and Keller has yet to receive a decision on his motion.
Two landmark appellate cases back up Keller’s motion. The crucial intervening case was a 2006 decision of the Fourth Circuit Court of Appeals in Life Partners, Inc. v. Morrison. The appellate court ruled that Virginia's Viatical Settlements Act, a direct analogue of Kentucky's Act, derived from the same model law came within the scope of the McCarran-Ferguson Act. The Fourth Circuit held that “the viatical settlement is not collateral to the life insurance policy. Rather, it modifies it, changing the parties' obligations and benefits, while yet leaving the insurance i.e., the transfer of the specific risk in place. At its essence, a viatical settlement is transaction that fractures the two-part insurance contract between the insurer and the insured and creates a new tripartite arrangement among the insurer, the insured, and the insured's assignee the viatical settlement provider. All of these matters, and more, regulated by the Virginia Viatical Settlements Act surely "relate to" the business of insurance in that they regulate the new ordering of the tripartite insurance arrangement involving the insurer, the insured, and the viatical settlement provider.”
The Fourth Circuit's holding was reinforced by the consonant decision of the Northern District of Georgia in National Viatical, Inc. v. Oxendine, which was affirmed on appeal by the Eleventh Circuit in 2007. The court determined that the McCarran-Ferguson Act applied to Georgia's implementation of the Model Life Settlement Act, the model upon which the Kentucky Viatical Act was based is a precursor of the Life Settlement Act.
Two appellate courts have handed down decisions which should exonerate Keller yet Circuit Judge Karl S. Forester, the judge who has presided over the case through its inception, has yet to rule on Keller’s motion. Forester ironically approved the forfeiture of Kelco-owned policies that were fraudulently-obtained by HIV/AIDS patients. The Government ultimately resold the policies on the living patients and collected death benefits on the deceased patients.