Viator and Investor Concerns

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" colspan=2 height=90 BGCOLOR="#006699" TEXT="#080000" bgproperties="fixed" background="122285a1erlcgo.gif"> <div> <FONT SIZE="5" COLOR="#FFCC66" FACE="Arial" ><B>Lifetime Settlements</B></FONT><B>     |     </B><A HREF="index.htm" TARGET="_top" TITLE="Lifetime Settlements"><U><B>home</B></U></A><B>       </B><A HREF="id15.htm" TARGET="_top" TITLE="TABLE OF CONTENTS"><U>TABLE OF CONTENTS</U></A>   |   <A HREF="id54.htm" TARGET="_top" TITLE="GLOSSARY"><U>GLOSSARY</U></A>   |   <A HREF="id76.htm" TARGET="_top" TITLE="Review"><U>Review</U></A>   |   <A HREF="id55.htm" TARGET="_top" TITLE="FINAL EXAMINATION"><U>FINAL EXAMINATION</U></A></div> <div> back to  <A HREF="id31.htm" TARGET="_top" TITLE="Uses and Abuses"><U><B>Uses and Abuses</B></U></A></div> <div> </div> </td> </tr><tr> <td valign="top" width=210 BGCOLOR="#FFCC66" TEXT="#080000" background="121d2c00dkelyh.gif"> <div> <A HREF="mailto:instructor@wallstreetinstructors.com" TARGET="_top" TITLE="mailto:instructor@wallstreetinstructors."><U><IMG SRC="12caf630.gif" border=0 width="175" height="99" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></U></A></div> <div> <TABLE BORDER="2" CELLPADDING="2" CELLSPACING="1" WIDTH="158" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 16 ><NOBR><div> <A HREF="mailto:instructor@wallstreetinstructors.com" TARGET="_top" TITLE="mailto:instructor@wallstreetinstructors."><U>e-mail an instructor</U></A></div> </NOBR></tD> </tR> </TABLE></div> <div>                                                   </div> <bR> </td> <td valign="top" height=390 BGCOLOR="#FFFFFF" TEXT="#080000"> <div> <B>Viator and Investor Concerns</B></div> <bR> <div> When the lifetime settlement is complete, the policyholder gives up ownership and control of the policy to another party.  Viators surrender their surviving family members' ability to collect the death benefit of that policy.  From an investor's perspective, a lifetime settlement is an investment in the timely death of the insured person -- which represents a significant investment risk.  The table below summarizes a number of risks buyers and sellers faces -- and concerns that investors and viators of life insurance policies should be aware of when contemplating a lifetime settlement.  As you can see from this list -- investors contemplating buying a viaticated policy face many more issues than viators.</div> <bR> <div> <TABLE BORDER="2" CELLPADDING="2" CELLSPACING="1" WIDTH="707" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#006699 > <tR> <tD VALIGN=CENTER HEIGHT= 39 WIDTH="127"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="39" ALIGN="bottom" WIDTH="127" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=TOP WIDTH="270"><div> <B>VIATOR CONCERNS</B></div> <div> <B>"the seller"</B></div> </tD> <tD VALIGN=TOP WIDTH="284"><div> <B>INVESTOR CONCERNS</B></div> <div> <B>"the buyer"</B></div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 247 WIDTH="127"><div> <B>negative financial impact on policyholder and others:</B></div> </tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="270"><div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">settlement may deny survivors of needed death benefits</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">unless escrowed properly, viators risk assigning the policy without receiving payment</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">proceeds may be inadequate to meet viator's needs</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">receipt of proceeds may cause the viator to lose other "means tested" benefits available from charitable organizations or government programs such as Medicaid, Medicare, Social Security, etc.</div> </tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="284"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="247" ALIGN="bottom" WIDTH="284" HSPACE="0" VSPACE="0"></tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 228 WIDTH="127"><div> <B>Privacy and tracking problems:</B></div> </tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="270"><div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">many people are involved in the transaction and they may have access to personal information such as medical records</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">viators should inquire as to who will be privy to personal information</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">find out the identity of the escrow agent and their relationship, if any, to the settlement provider  </div> </tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="284"><div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">determine who is responsible for tracking the insured's health and whereabouts</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">examine the adequacy of the tracking process -- the insured may not comply with requests for information or medical exams </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">the insured may use the proceeds to travel, making efforts to track (or obtain a death certificate) more difficult</div> <bR> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 418 WIDTH="127"><div> <B>Know who is responsible for various actions:</B></div> </tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="270"><div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">the viator may have to pay off any policy loans before selling the policy</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">in the case of permanent insurance, what will happen to policy dividends, accidental death benefits, and other riders or benefits attached to the policy?</div> </tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="284"><div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">know the method(s) the settlement provider will use to track the insured</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">who is responsible for obtaining a copy of the death certificate and the costs associated with that effort</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">future premiums must be paid to keep the policy in force -- are those costs "escrowed"? if so, for how long? if not, who is responsible for making those payments?</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">will benefits be paid by the insured directly to the investor as a named beneficiary on the policy, or indirectly through a trust established by the settlement provider</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">in the investment contract the settlement provider should guarantee prompt payment of the death benefits when the insured dies</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">be aware of any administrative fees imposed (for tracking insured, escrow accounts, etc.)</div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 323 WIDTH="127"><div> <B>Life expectancies are only estimates</B></div> </tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="270"><div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">viators may outlive the anticipated life expectancy, and proceeds may not last long enough</div> </tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="284"><div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">how is the life expectancy estimate determined?</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">is the person estimating life expectancy qualified?  independent of the settlement provider?</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">was life expectancy based on a physical examination of the insured or a review of medical records?  was there a second opinion?</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">if the insured outlives the life expectancy, the investor's rate of return will be less (sometimes far less) than anticipated</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">the insured may outlive the investor, which may cause problems in probate or other estate-planning issues</div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 209 WIDTH="127"><div> <B>Group life policies are owned by a third party (such as an employer)</B></div> </tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="270"><div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">viators should determine who will be responsible for converting the group certificate to individual coverage </div> </tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="284"><div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">investment in a group life certificate is not as "safe" as an "individual" policy.  The policyholder (the employer) may change the contract or even drop it in favor of another group policy.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">some group policies cap the amount of group certificates that can be converted to individual policies</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">conversion from group to individual coverage usually results in a higher future premium payments</div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 362 WIDTH="127"><div> <B>Not all settlement providers are the same:</B></div> </tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="270"><div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">offers can vary widely from one provider to another -- viators should shop around</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">make sure the broker and provider are properly licensed</div> </tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="284"><div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">investors should determine the process of recovering his or her investment if the provider goes out of business</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">investors should be ready to trace the purchased policy in case the provider goes out of business -- investors should insist on disclosure of the name of the insurance company and policy numbers of any policies they have invested in</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">investors should evaluate the financial solvency of the settlement provider</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">make sure the agent and provider are properly licensed</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">viatical settlement providers may be subject to different state laws and rules (or no laws at all) depending on where they conduct business</div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 229 WIDTH="127"><div> <B>The right to the death benefit may be questionable:</B></div> </tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="270"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="229" ALIGN="bottom" WIDTH="270" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="284"><div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">the viator's heirs may challenge the assignment </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">the policy may be under a court-ordered restriction, such as a divorce settlement in which one party is responsible for maintaining the policy while the other party remains as beneficiary.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">investor should investigate any possible legal challenges -- competency of the viator, pending lawsuits against the viator</div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 267 ><NOBR><div> <B>Lack of control:</B></div> </NOBR></tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="270"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="267" ALIGN="bottom" WIDTH="270" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="284"><div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">the investment "matures" upon the death of the insured -- and an unknown date in the future.  There are no provisions for early payment</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">dependent on the continued existence and financial solvency of the viatical settlement provider to track the investment until maturity</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">death benefits will be paid only upon filing a valid claim, which includes a death certificate.  Administrative problems in obtaining a death certificate may delay eventual payment. </div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 229 ><NOBR><div> <B>possible fraud</B></div> </NOBR></tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="270"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="229" ALIGN="bottom" WIDTH="270" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="284"><div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">be aware of the contestability period of any policy invested in -- "wet paper"</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">be aware that the applicant may have obtained the policy fraudulently -- "cleansheeting"</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">be aware of circumstances in which the insurer may deny claims after the contestability period -- impersonation, lack of insurable interest, fraud involving the viator and settlement provider</div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 193 WIDTH="127"><div> <B>tax consequences</B></div> </tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="270"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="193" ALIGN="bottom" WIDTH="270" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=TOP BGCOLOR=#FFCC66 WIDTH="284"><div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">there may be serious tax planning implications, investors should discuss these with their tax advisors</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f099660000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">investment in lifetime settlements through a retirement account such as an IRA or 401(k) can create difficulties if the insured does not die before retirement funds are needed or before mandatory distributions must begin (usually age 70<FONT SIZE="3" COLOR="#006699" FACE="Arial" >½</FONT>)</div> </tD> </tR> </TABLE></div> <bR> <div> <TABLE BORDER="2" CELLPADDING="1" CELLSPACING="1" WIDTH="97" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" 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