Quick Fact Sheet on Viatical Settlements and Life Settlements
March 31, 2020

Terms you should know:

DB:  Death Benefit

FV: Face Value (amount for which the insured is insured upon death)

ADB: Accelerated Death Benefit

LE: Life Expectancy

VS: Viatical Settlement

LS: Life Settlement

Prm: Premium

Ins: Insured

Ben: Beneficiary

CV: Cash Value

CSV: Cash Surrender Value

UL: Universal Life

KMI: Key Man Insurance

WL: Whole Life

GLI: Group Life Insurance

Term 10,. . . . . 20, 25, 30: Term policy with the number indicating the length of years term

Excl: Exclusions or Exclusionary period

APS: Attending Physician Statement

DI: Double Indemnity

EOL: End of Life

Most policies expire at age 99 (unless it is a specific term policy) and pay out the entire FV at that time.

Owner and beneficiary are not the same but can be if there is an assignment.

Owner of a policy may change the beneficiary at any time barring a court order or legally binding contractual agreement (such as a divorce decree).

Only the owner of the policy may make any changes including decreasing the DB, withdrawing CV, increasing the FV, etc.

The owner of the policy may assign (transfer ownership) at will (barring a court order not allowing it).

Grace periods for failure to pay premiums can range from 30 – 60 days depending on local statutes.

Suicide exclusions apply for the first 2 years; 1 yr in Colorado. Some countries have no suicide clause.

Some activities and locales of residence may nullify and void the policy. For example, some extreme sports or modes of travel or residence in certain countries may void a policy. Travel advisory warnings due to war or unrest may void a policy should travel consummate after the travel advisory is in effect. War nullifies life insurance for deaths as a result of conflict.

Payouts can be contested through an “interpleader” action with the court. In these cases, the life insurance company pays the funds into the court who holds them until a court order releases the funds to a party or the court approves a compromise.

Where no beneficiary is designated, the surviving legal spouse is first in line for beneficiary rights; then children of the deceased; then parents of the deceased; then siblings of the deceased; then nieces, nephews. 

Viaticals are tax exempt if the LE is less than 2 years.

Proceeds from LS transactions or Viaticals where LE is greater than 2 yrs is subject to a capital gains tax (amount of DB minus all premiums paid into the policy for a net capital gain).

In almost all Viatical or LS transactions, existing beneficiaries will be required to sign a statement waiving their beneficiary rights. Same holds for spouses regardless of beneficiary designation.

Viaticals and LS are required by law to be reversed upon demand by the owner within 30 days of receiving funds. 

Should the insured die within 30 days of funding, the law requires a complete reversal of the transaction.

Escrow accounts are normally used to wire the funds while awaiting acknowledgement from the insurance company of receipt and approval of policy ownership transfer.

It is normal and allowed for doctors to charge fees for providing an APS and medical records.

HIPA laws apply to medical records in a VS or LS transaction or process.

A policy owner with any kind of mental disability makes VS and LS transactions null and void and subject to being successfully contested.

All parties involved in vetting, processing and acting in the course of a VS or LS transaction has a legal fiduciary responsibility to the policy owner.

Fees for brokering or processing a VS or LS are allowed only if one is licensed to act in such a capacity by the state of residence of the insured.

Almost all states have laws regarding VS and many on LS. 

Funds received from a VS or LS may be used to pay for experimental drugs or treatments not covered by health insurance; caregivers; medical case managers; retrofitting the habitat for the client; to be disbursed to loved ones during their lifetime; to pay estate taxes; to buy special medical equipment not covered by insurance; or for any need or desire by the owner of the settlement. 

Be sure to consult with a financial adviser or tax attorney on these transactions before consummating any transaction on a viatical or life settlement.