Key Points in This Section
- A viatical settlement prospect must own or be the insured under a policy covering a terminally ill individual; age is not a requirement — the viator may be quite young
- The viator’s primary consideration is that current financial needs outweigh the future interests of the policy beneficiary
- Most settlement companies require a minimum face amount (typically $100,000 or more) before considering a policy
- A viatical settlement may be combined with accelerated death benefits to maximize total proceeds to the viator
- The NAIC’s Viatical Settlements Model Act sets minimum percentage payments to viators based on life expectancy, ranging from 80% (less than 6 months) to 50% (24 months or more)
- Payouts may be reduced by up to 5 percentage points for policies issued by lower-rated insurers (below the four highest A.M. Best categories)
Viatical Settlements — Prospects
Who Is a Viatical Settlement Prospect?
The primary requirement for a viatical settlement is that the viator owns (or is the insured under) a life insurance policy covering a terminally ill individual. Unlike senior settlements, there is no age requirement — the viator may be quite young, as were many of the AIDS-afflicted viators in the market’s early years.
The primary motives for viatical settlements are:
- Obtaining needed medical care
- Paying outstanding bills and debts
- Maintaining independence by covering living expenses during a terminal illness
- Spending quality time with loved ones while still able to do so
In most cases, the terminally ill insured is also the policyowner, though the policy may also be owned by a spouse, family member, trust, or other fiduciary. The core consideration is that the viator judges the current need for funds to outweigh the future interests of the policy’s beneficiary. Once the policy is viaticated, the death benefit passes to the investor rather than the former beneficiary.
Terminally ill individuals often face mounting medical expenses while also losing their income. In these circumstances, a viatical settlement can become a critical financial resource. Other potential sources of funds — such as accelerated death benefits from the insurer — may not be available or may not be sufficient. In some cases, a combination of accelerated death benefits and a viatical settlement produces the largest total recovery for the viator.
NAIC Minimum Pricing Standards
While viators and settlement companies negotiate individual terms, the NAIC’s Viatical Settlements Model Act establishes minimum payout percentages to help ensure viators receive a reasonable return. These standards were developed when the market consisted primarily of terminally ill viators and are less applicable to the longer life expectancies in senior settlements.
| Insured’s Life Expectancy | Minimum % of Net Face Value Paid to Viator |
|---|---|
| Less than 6 months | 80% |
| At least 6 but less than 12 months | 70% |
| At least 12 but less than 18 months | 65% |
| At least 18 but less than 24 months | 60% |
| 24 months or more | 50% |
| * Net face value = policy face amount less any outstanding loans or liens. The Model Act permits these percentages to be reduced by 5 points for policies issued by insurers rated below the four highest categories by A.M. Best or an equivalent rating agency. | |
Applying the NAIC Standards — Examples
Example 1 — Six-Month Life Expectancy
A viator with a 6-month life expectancy holds a $100,000 policy issued by a highly rated insurer. Under the NAIC Model Act, the minimum payout is 80% of net face value:
Minimum settlement = $100,000 × 80% = $80,000
If the same policy were issued by a lower-rated insurer (below A.M. Best’s four highest categories), the percentage may be reduced by 5 points to 75%: $75,000.
Example 2 — Thirty-Month Life Expectancy
A viator with a 30-month life expectancy holds a $250,000 policy from a highly rated insurer. At 30 months, the applicable minimum is 50%:
Minimum settlement = $250,000 × 50% = $125,000
For a lower-rated insurer, the percentage drops to 45%: $112,500.
Illustrative Case Studies
The following examples illustrate how viatical settlements have provided financial relief in real-world situations. Specific identifying details have been generalized.
Case Study 1 — Meeting Daily Needs
A 61-year-old man diagnosed with prostate cancer had approximately six months to live. Too ill to work, with three children still at home and facing foreclosure, his only significant asset was a $500,000 term life insurance policy. By selling a portion of the policy through a viatical settlement, the family raised enough to cover medical expenses and clear outstanding debts. The settlement proceeds provided the financial stability that allowed him to focus on his health and family during his final months.
Case Study 2 — Funding Long-Term Care
A man in his mid-seventies had been residing in a long-term care facility for five years following a stroke. His funds were nearly exhausted. He held a whole life policy with a $750,000 death benefit, but had already borrowed against it to the maximum extent — leaving no remaining cash surrender value. His family was about to let the policy lapse. Instead, an estate planning attorney arranged a viatical settlement: the client received $170,000 in cash without having to repay the outstanding policy loan. The settlement was a windfall compared to the nothing they expected from a lapse. The insured died approximately two years later.