Viaticals: Mutual Funds For Alternative Life Settlements

Viatical settlements are arrangements in which terminally or chronically ill individuals sell their life insurance policies to investors at a discount from their face value in exchange for a lump sum of cash. The buyer then pays all future premiums and becomes the sole beneficiary of the full amount of the policy when the original owner dies. Viatical settlements gained popularity in the 1980s during the AIDS epidemic, when life expectancy after diagnosis was short but treatment costs were high. While viatical settlements can provide much-needed cash for ill individuals, they are considered extremely risky and unethical investments due to the speculative nature of betting on someone's death and the potential for lawsuits and fraud. However, a niche category of private mutual funds that invest in life settlements does exist, giving investors access to a diverse portfolio of policies to mitigate some of the risks.

Viatical settlements are high-return, low-risk investments

Viatical settlements are also attractive to investors because they are not tied to the stock or bond market. This means that the return on investment will not fluctuate based on the economy or stock market performance. The return on investment is also relatively predictable compared to other alternative assets such as collectibles, wine, cryptocurrency, or real estate.

Additionally, viatical settlements provide investors with a guaranteed payout. The investor purchases the policy at a discount from its face value, keeps the policy in force by paying the premiums, and ultimately collects the death benefit. The only unknown factors are how long the investor will hold the policy and how much they will pay in total premiums.

Viatical settlements are also a good diversification strategy for investors as they are alternative assets that don't correlate with the financial markets. This can help investors hedge against volatile economic or stock market conditions.

They are also ill policyholders' source of urgent cash

A viatical settlement is a contractual agreement that allows someone who is terminally or chronically ill to sell their life insurance policy for a lump sum of cash. The buyer of a viatical settlement, known as the viatical settlement provider, purchases the policy at a discount from its face value, becoming the new policy owner. The seller of the policy, known as the viator, gives up the right to leave the policy's death benefit to a beneficiary of their choice.

The viatical settlement provider pays the viator a one-time sum of cash and takes on the responsibility of paying all future premiums on the policy. Upon the death of the viator, the provider, as the new owner of the policy, receives the full death benefit from the insurance company. The rate of return for the viatical settlement provider depends on when the viator dies; if the viator lives longer than expected, the return will be lower, and if the viator dies sooner than expected, the return will be higher.

Viatical settlements can be a source of urgent cash for ill policyholders, enabling them to access immediate funds that can be used to pay for medical expenses, care, and comfort in their final days. It provides a way for individuals to sell their life insurance policies and obtain cash without having to rely on other assets, such as their homes, which they may not want to sell before their death.

While viatical settlements can provide much-needed financial relief for ill individuals, it is important to carefully consider the risks involved. The rate of return for the investor is uncertain as it depends on the timing of the viator's death, which cannot be predicted accurately. Additionally, there may be tax implications, creditor claims, and eligibility changes for government benefits or entitlement programs associated with the settlement. Before entering into a viatical settlement, it is crucial to seek professional advice and thoroughly understand the potential risks and implications.

The investor's return depends on the seller's life expectancy

Viatical settlements are a way for terminally ill individuals to receive an immediate return on their life insurance policy. The seller of the life insurance policy relinquishes the right to leave the policy's death benefit to a beneficiary of their choice in exchange for a lump sum payout. The buyer of a viatical settlement then pays all future premiums left on the life insurance policy and becomes the sole beneficiary.

Due to the uncertainty of the seller's life expectancy, viatical settlements can be extremely risky from an investment perspective. The rate of return is unknown because it is impossible to know when someone will die. Therefore, the longer the life expectancy, the cheaper the policy. However, because of the time value of money, the longer the person lives, the lower the rate of return.

To mitigate the risks associated with viatical settlements, investors should perform due diligence before purchasing them. Additionally, investors should ask their state insurance commissioners for more information and review the disclosure documents closely to understand the potential risks and returns.

Viatical settlements are highly regulated at the state level

Viatical settlements, or viaticals, are transactions in which a terminally ill individual sells their life insurance policy for a lump sum. The buyer of the policy pays all future premiums and becomes the beneficiary, receiving the full payout when the original policyholder dies.

State-level regulations primarily focus on consumer protection, covering the following key areas:

• Licensure: Requirements for parties representing viators, such as life settlement and viatical settlement brokers.
• Escrow: Ensuring all transactions are funded into an escrow account before the policy owner transfers ownership to the life settlement company.
• Fraud Prevention: Rules prohibiting the sale of a life insurance policy until a certain period has passed since the policy was issued, usually two or five years.
• Minimum Cash Payments: Regulatory requirements stating the minimum cash payment to the policy owner in a sale.
• Disclosure: Outlining the impacts of selling a policy, including effects on Medicaid eligibility, availability of accelerated death benefits, and other key considerations.
• Filing of Settlement Contracts: State regulators review and approve settlement contract forms for use in viatical settlement transactions.

The specific regulations and definitions of viatical settlements can vary slightly between states, but overall, the state-level regulatory framework aims to protect consumers and provide oversight in this industry.

They are best suited for investors with ample cash on hand

Viatical settlements are arrangements where someone who is terminally or chronically ill sells their life insurance policy for a lump sum of cash. The buyer of the settlement then pays all future premiums and becomes the beneficiary of the full amount of the policy when the original owner dies.

Viatical settlements are extremely risky investments. The rate of return is dependent on the seller's life expectancy and the actual date of their death. If the seller lives longer than expected, the return will be lower, and the investor may even lose part of their principal investment.

Due to the high-risk nature of viatical settlements, they are best suited for investors with ample cash on hand. Ample cash on hand refers to the amount of accessible cash a business has after paying all its costs. It includes any assets that can be liquidated into cash within 90 days. Having ample cash on hand allows investors to take advantage of buying opportunities without having to wait for financing or incurring debt liability.

For individual investors, it is recommended to have at least 5% of their portfolio in cash, while others suggest keeping between 10% and 20% in cash as a hedge. This provides investors with the flexibility to make investments during market downturns and take advantage of opportunities.

Additionally, having ample cash on hand can be a lifeline for businesses during financial crises when other forms of funding dry up. It allows companies to pay rent, operating costs, and vendors even if their income stream slows down. It also reflects positively on the health of the company, making it more attractive to potential investors, partners, or customers.

However, there is a fine line between having ample cash on hand and holding too much cash. Holding too much cash can lead to inflation losses and opportunity costs. Therefore, investors with ample cash on hand should carefully consider their investment strategies and be prepared to take on the risk associated with viatical settlements.

Frequently asked questions