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Key Points in This Section

  • Viatical settlements are used to provide needed medical treatment, income, and end-of-life financial support
  • Tax-free treatment under HIPAA applies to terminally ill viators with a life expectancy of 24 months or less; however, some settlement companies also purchase policies from insureds with longer terminal diagnoses
  • The viatical settlement market is now a relatively small segment of the broader secondary market, which is dominated by senior/life settlements
  • Medical advances — particularly antiretroviral therapies for HIV/AIDS — significantly reduced the pool of traditional viatical candidates and helped shift the market toward senior settlements
  • Settlement companies will purchase virtually any life insurance policy from a major insurer, but have a strong preference for universal life policies due to premium flexibility
  • Term and group policies must include a conversion feature to qualify, as the buyer will typically convert them to permanent coverage

Viatical Settlements — Market

Uses of Viatical Settlement Proceeds

Viatical settlements have most often been used to provide needed medical treatment, to produce income during an illness, or to cover end-of-life expenses. For viators facing a terminal diagnosis with a relatively short prognosis, the settlement transforms an illiquid asset — a life insurance policy — into immediate cash when it is most needed.

Tax note: Under HIPAA (1996), tax-free viatical settlement proceeds are available to terminally ill individuals with a life expectancy of 24 months or less. Despite this tax threshold, some settlement companies also purchase policies insuring individuals with terminal diagnoses and life expectancies up to 60 months, though the tax treatment in those cases differs. Tax treatment is covered in detail in Chapter 6.

Market Size & Evolution

The viatical settlement market developed rapidly in the late 1980s and early 1990s, driven largely by the AIDS crisis. At its peak in the mid-1990s, viatical settlements represented the dominant form of secondary market life insurance transactions. Today, viatical settlements represent a relatively small and shrinking share of the overall secondary market, which is now dominated by senior and life settlements. The combined secondary market for life insurance policies (viatical and life settlements together) processes in excess of $4 billion in face value annually, with viatical transactions accounting for a modest fraction of that total.

Historical context — The AIDS crisis and market shift: The early viatical settlement market was populated largely by younger men afflicted with AIDS. Medical and pharmacological advances — particularly the introduction of protease inhibitors and combination antiretroviral therapies beginning in the mid-1990s — significantly lengthened the life expectancy of people living with HIV/AIDS. As a result, AIDS-related viatical settlements declined sharply, and the industry pivoted toward older policyowners with other terminal conditions and, increasingly, toward the broader senior settlement market.

Eligible Policy Types

Settlement companies will purchase virtually any life insurance policy underwritten by a major life insurer. Eligible policy types include:

Whole Life Policies Permanent coverage with guaranteed cash values. Fully eligible with no conversion requirement.
Universal Life Policies The preferred policy type for settlement companies due to premium flexibility, which gives investors greater control over ongoing costs.
Convertible Term Life Policies Eligible only if the policy includes a conversion feature. The settlement company will typically convert the term policy to a permanent policy to ensure coverage does not expire before the insured’s death.
Group Life Certificates Eligible only if the certificate includes a conversion feature, for the same reason as convertible term policies. Pure non-convertible group coverage is generally not settleable.

Ownership Requirements

Viatical settlements most commonly involve policies where the insured is also the policyowner. However, this is not always the case — the policy might be owned by a spouse, another family member, a trust, or another fiduciary. The only essential requirements for a viatical settlement are that:

  • The insured is terminally ill (life expectancy of 24 months or less for HIPAA tax-free treatment)
  • The policyowner is willing to sell the policy and has legal authority to do so
  • The policy is beyond its contestability period (i.e., it is not a nonconforming policy)
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