Chapter 2 — Basics of Lifetime Settlements

• The process of selling a life insurance policy is comparable to a real estate closing — not a quick transaction. From completed application to receipt of funds typically takes four to ten weeks
• The viatical settlement broker shops the policy to multiple buyers; the buyer pays the broker’s commission, not the viator
• A viator should obtain three to five competing bids and verify that all settlement companies are properly licensed
• Settlement funds are typically held in independent escrow until closing documents are executed and ownership/beneficiary changes are recorded
• The primary driver of settlement price is life expectancy — the shorter the expectancy, the higher the payout as a percentage of face amount
• Viatical settlements (terminally ill, 24 months or less) generally command significantly higher percentages of face value than senior/life settlements (longer life expectancies)

The process of selling a life insurance policy — viaticating in industry jargon — is relatively straightforward. In many respects it mirrors the process of purchasing a life insurance policy, but in reverse.

The Settlement Process

1. 1
   The policyowner engages a viatical settlement broker, attorney, life insurance agent, or financial planner to represent them and shop for the best offer. The broker’s commission is paid by the buyer — not the viator. In many states, brokers must be licensed; always verify licensure before proceeding.
2. 2
   The broker helps the policyowner complete an application disclosing information about the insured, medical history, and attending physicians. The policyowner also provides a copy of the policy and a policy release authorizing verification of coverage from the insurer.
3. 3
   The insured provides a medical release authorizing physicians to share medical records, and obtains a letter from a physician attesting to the insured’s competency.
4. 4
   The broker presents the policy and medical information to a range of potential buyers and solicits competing offers.
5. 5
   Offers are presented to the policyowner. Once an offer is accepted, closing documents are executed, a new beneficiary is named, and funds held in independent escrow are released to the viator.

What a Policyowner Should Consider

Experts recommend that policyowners contemplating a settlement take the following steps:

• Discuss life expectancy with a physician
• Obtain three to five competing bids from licensed settlement companies
• Seek professional legal and financial advice before accepting any offer
• Check with state authorities to verify that settlement companies are properly licensed and that no complaints have been filed against them
• Weigh the immediate need for funds against the future financial needs of dependents and beneficiaries
• Ask the insurance company to split a large policy into several smaller policies, so policies can be sold incrementally as needed
• Account for any guaranteed face amount increases when evaluating offers
• If covered under a group life insurance policy and leaving an employer, do not let the coverage lapse — it may be convertible to individual coverage within the first month after termination, and that converted policy may qualify for a settlement
• Determine how frequently the settlement company will contact the insured to monitor its investment

Timing — Factors Affecting Speed of Settlement

Unlike securities transactions, which settle in days, a life insurance settlement is comparable to a real estate closing. From the time a completed application is received, disbursement of funds typically takes four to ten weeks. The timeline depends on two categories of factors:

Size of the Settlement — Pricing Factors

The amount a viator can expect to receive depends on several factors. Viatical settlements — involving terminally ill insureds with life expectancies of 24 months or less — generally command a significantly higher percentage of the policy’s face amount than senior or life settlements, where life expectancies are considerably longer. Pricing factors for senior settlements are discussed in detail in Chapter 3.

In all cases, the price paid for a life insurance policy is based on:

• Life expectancy — the shorter the expectancy, the higher the settlement as a percentage of face value
• The annual premium amount — higher ongoing premiums reduce the net value to the buyer
• Policy type and insurer rating — well-rated insurers and favorable policy structures command better offers
• Market rates available on comparable investments — settlement pricing competes with alternative investment returns
• Whether the policy is beyond the contestability period — nonconforming (in-contestable-period) policies generally cannot be settled