Key Points in This Section
- Viatical settlements involve terminally ill insureds (life expectancy 24 months or less); proceeds are typically used to meet current medical and living expenses
- Senior settlements involve older insureds who are not terminally ill; proceeds are more often redeployed for investment, estate planning, or alternative coverage
- From an investor’s perspective, viatical settlements offer more predictable return projections; senior settlement returns are harder to forecast due to less certain life expectancies
- Tax treatment of proceeds differs significantly between viatical and senior settlements — covered in Chapter 6
- Regulatory frameworks were largely built around viatical settlements and may not fully address the now-larger senior/life settlement market
Viaticals vs. Senior Settlements
The secondary market for life insurance has developed into two distinct segments. Understanding the differences between them is essential for agents and advisors working with clients who own life insurance policies.
| Factor | Viatical Settlement | Senior Settlement |
|---|---|---|
| Insured’s condition | Terminally ill — life expectancy 24 months or less | Healthy or impaired, age 65 or older — life expectancy more than 24 months |
| Viator’s motivation | Meet current medical costs and living expenses | Redeploy assets; original purpose for insurance no longer exists |
| Investment return predictability | Higher — medical diagnosis allows more precise life expectancy projections | Lower — life expectancy estimates for “impaired” seniors are less precise |
| Tax treatment of proceeds | Generally income-tax-free for terminally ill viators (HIPAA) | Tax treatment varies; partially taxable in many cases (see Chapter 6) |
| Primary regulatory framework | NAIC Viatical Settlements Model Act | Increasingly covered under updated model acts, but less uniformly regulated |
A note on regulation: Government regulation typically develops in response to changing market conditions — regulators are reactive, not proactive. State regulations, including the NAIC’s Viatical Settlements Model Act, were largely built around the viatical market as it existed in the 1990s. As senior and life settlements have grown to represent the larger share of the secondary market, regulatory frameworks have evolved but remain uneven across states.
Why Policyowners Sell Their Policies
There are many reasons why a policyowner would sell an in-force policy. The motivations differ considerably between viatical and senior situations.
Viatical Settlements — Common Uses
- Obtain needed medical care
- Pay outstanding bills and debts
- Maintain independence by covering living expenses
- Spend quality time with loved ones — such as a special trip — while still able to do so
Senior Settlements — Common Uses
- Reinvest proceeds because the original purpose for the life insurance no longer exists
- Purchase more cost-effective or appropriate coverage, such as long-term care or survivorship policies
- Update an estate plan
- Make intra-family gifts
- Support favorite charitable organizations
Business Uses
- Buy out an employer’s interest in a split-dollar life insurance arrangement
- Fund new business ventures or expand existing operations
- Repay debt
- Buy back a business interest from a partner or co-stockholder
- Facilitate a business transfer or succession
Charitable Organization Uses
- Raise immediate funds for daily operations or capital budgets
- Eliminate ongoing cash outlays for premium payments on donated policies
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