The emergence of the secondary market for life insurance has given rise to a specific vocabulary. Before proceeding further, it is important to understand these terms and their meanings.
Please note: The following terms are presented in their common industry usage. Some states have enacted laws that define these terms more narrowly in a legal context. We recommend becoming familiar with the state laws that apply to you before engaging in any settlement transactions. Florida’s regulatory framework is covered in Chapter 4.
Origins of the Word “Viatical”
The word viatical comes from the ancient Roman term viaticum, which referred to the custom of providing money or supplies to an officer embarking on an official mission. Over time, it came to mean provisions for any journey. In the context of a viatical settlement, the “journey” envisioned is the journey to death — and the settlement provides funds for that journey.
The Participants
A viatical settlement is the sale of a life insurance policy by an individual with a life-threatening illness to a third party in return for a lump-sum payment representing a percentage of the policy’s face amount. As currently defined by the NAIC Model Act and HIPAA, a viatical settlement generally involves individuals with a life expectancy of 24 months or less.
Viator
The policyowner who sells the life insurance policy. In individually owned policies, the viator is typically also the insured — but in business-owned policies the viator and insured may be different parties. The term applies regardless of whether the insured is terminally ill or a healthy senior.
Viatical Settlement Provider
The licensed entity that purchases the life insurance policy from the viator pursuant to a viatical settlement contract. The provider may hold the policy, resell it to investors, or act as a clearinghouse for other investors.
Viatical Settlement Broker
A licensed intermediary who negotiates on behalf of the viator with one or more viatical settlement providers. The broker is deemed to represent only the viator and owes the viator a fiduciary duty.
Viatical Settlement Purchaser
Also called a settlement funding company — a person or entity that buys a viaticated policy from a viatical settlement provider, either as an individual investment or as part of a pooled portfolio.
Viatical Settlement Investment Agent
An agent employed by a viatical settlement provider to solicit funding from investors for the purchase of viatical settlements.
Viatical Settlement Contract
The written agreement between the viatical settlement provider and the viator establishing the terms of the purchase — including the compensation paid in exchange for assignment, transfer, or sale of the death benefit or policy ownership.
Once a policy is purchased by a viatical settlement provider, the provider may resell the policy to another investor or group of investors. A viatical settlement purchase agreement is the contract by which a viaticated policy is purchased from the provider — this differs from the viatical settlement contract because the viator is not a party to it.
Participant Flow
The following diagram shows the typical chain of parties in a viatical settlement transaction:
Viator
seller / policyowner
↔
Viatical Settlement Broker
represents viator
↔
Viatical Settlement Provider
licensed purchaser
↔
Settlement Investment Agent
solicits investors
↔
Viatical Settlement Purchaser
ultimate investor
Terminally Ill vs. Chronically Ill
The terms terminally ill and chronically ill have specific definitions that affect how a settlement is taxed. (Tax treatment is covered in Chapter 6.)
Terminally Ill
An individual with an illness or sickness that can reasonably be expected to result in death within
24 months or less. This definition is used in both the NAIC Viatical Settlements Model Act and HIPAA (1996).
Chronically Ill
An individual who is:
- Unable to perform at least two activities of daily living (ADLs); or
- Requiring substantial supervision to protect themselves from threats to health and safety due to severe cognitive impairment
Activities of daily living, in order of increasing severity: mobility, bathing, dressing, toileting, transference, continence, and eating.
Other Important Terms
Life Expectancy
The mean number of months the insured under the policy to be viaticated can be expected to live, as determined by the viatical settlement provider based on medical records and appropriate actuarial data.
Net Death Benefit
The face amount of the life insurance policy to be viaticated,
less any outstanding debts or liens against the policy.
Viatical Settlement Proceeds
The lump-sum payment received by the viator. Proceeds will be greater than the policy’s cash surrender value (the amount the insurer would pay) and less than the net death benefit (the amount the investor ultimately collects when the insured dies). The precise amount is based on life expectancy, anticipated future premiums, quality of the issuing insurer, and prevailing market conditions.
Patient-Identifying Information
Information that could disclose the identity of the insured, including: address, telephone number, fax number, photograph or likeness, employer, employment status, Social Security number, and any other information likely to lead to identification. Protecting the insured’s privacy is a critical ethical and regulatory obligation covered in Chapter 5.
Senior Settlement
The transfer of ownership or benefits of an in-force life insurance policy insuring a
healthy individual age 65 or older with a life expectancy of
more than 24 months. Although distinct from a viatical settlement, the same terminology (viator, provider, broker, etc.) extends to senior settlements as well.
Nonconforming Policy
A life insurance policy that is still within its
contestable period. Nonconforming policies generally cannot be viaticated or settled.