Investor Protection Guide: Viaticals

A viatical settlement, also known as a life settlement, is a sale of a life insurance policy of an insured person with an abbreviated life expectancy.  Sellers are typically terminally ill patients who want to cash out of their life insurance policies before death.  Individuals without terminal illness, however, may also sell their life insurance policies.  Buyers purchase these policies at a price that is less than the death benefit of the policy.  When the seller dies, the investor collects the death benefit.

Viatical settlements can be risky investments.  Salespeople who are paid large commissions often pressure investors to purchase viatical settlements.  Generally, viatical settlements involve insured individuals with a life expectancy of less than two years.  The return on a viatical investment depends upon the seller’s life expectancy and the actual date of death.  If the seller dies before the estimated life expectancy, the investor will receive a higher return.  On the other hand, if the seller lives longer than expected, the investor’s return will be lower.  The investor can even lose part of the principal investment if the person lives long enough that the investor has to pay additional premiums to maintain the policy.  In addition to losing the principal investment, investors may also lose the penalty they paid for cashing in a policy early.

Before purchasing viatical settlements, investors should perform due diligence just like they should with any other type of investment.  In addition, they should ask their state insurance commissioners for more information.

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