viatical settlements and insurance law and HIV

With the coming of the AIDS crisis in the 1980s a new insurance instrument emerged which was designed to give the insured as much of the face value of his/her life insurance policy as possible while still living in order to meet expenses associated with a terminal illness. In this way it seemingly went against the basic concept of life insurance--that it is a benefit paid after death and to beneficiaries who are other than the named insured. Yet, the nature of the transaction has become popular, and viatical settlement companies are, if permitted by state legislation, flourishing.

Background and Definitions

In a nutshell, a viatical settlement consists the assignment by the owner, and named insured, of a life insurance policy to an intermediary (the viatical company) for a percentage of the face value of the policy (usually 50-80% based on the life expectancy of the named insured) to be paid immediately to the named insured. A viaticum, in Catholic theology, is the celebration of the sacrament of Holy Communion by one on his or her deathbed. The word means "traveling" or "journeying," and the celebration of the sacrament was meant to be a help in the soul's "journey" to God after death. A secular meaning of the word is "an allowance (as of transportation or supplies and money) for traveling expenses or provisions for a journey." Thus, a "viatical settlement" helps the person "on the way" to the end of his/her life.

The original beneficiary needs to assign its rights in the policy to the viatical company ("VC"), so that the company is now the owner of the policy. The company then will either keep the policy or will be a broker for the policy to investors. An example of how it might work is as follows.

A viator (owner/named insured) approaches a VC once a diagnosis of terminal illness is made. Usually the requirement of a diagnosis of under two years (and sometimes six months) of life is required. The VC will fully, and even intrusively, examine the medical condition and records of the viator to determine how much it will pay to him/her for the policy. For example, if the person is "knocking at death's door," and has a $1,000,000 life insurance policy, the company may be willing to pay the viator $800,000 immediately. The viator then assigns the policy to the company and the beneficary assigns his/her rights to the proceeds to the VC. Often statutes require a "15 day" period where a purchaser can get out of the deal. You can imagine that there might be some high pressure sales tactics brought to bear in situations like this. Well, the VC will either hold the policy and cash in on it when the viator dies or will sell it to an investor for perhaps $850,000.

Look at it this way. If the VC immediately sells the policy, it has made $50,000 almost overnight. Of course there was staff work that went into the arrangements and lots of overhead, but it makes a nice profit for the company. In addition, the investor, who buys the policy for $850,000 may need to wait only a few months for the person to die. S/he can make at least 15% on his/her money in a matter of months. It is the classic "win-win" situation. Or is it?

Incentive to Fraud/Unconscionability

Congress has gotten into the act and declared, in 1997, that the proceeds of a VS are non-taxable for the named insured. It is debated now where creditors of the viator stand in relation to each other and with relation to viator's medical bills. In addition, the viator may just plan to "blow it all" on a trip around the world. You need to delve deeply into this complex area to answer the myriad of questions that no doubt have and will arise as a result of these policies.

But the temptation to insurance fraud and unconscionable action is rife here. With respect to unconscionability, one can easily understand how high pressure techniques and one-sided terms might be foisted on a suffering person in a situation like this. Would you like to be a "salesperson" for a VC? But, on the fraud front, there have been more than isolated cases of dying people taking out life insurance policies and using dummies (well, they aren't so dumb, but they are "stand ins") to take medical exams and give saliva samples/other things in order to secure a policy. The policy issued, the dying person (often with HIV/AIDS) then sells the policy to a VC, who in turn sells it to an investor. The insurance company, in the end, is defrauded. Of course, if there is the kind of vigilance that we all imagine there ought to be, there is no problem, but often people bent on fraud tend to find ways around the system.

Conclusion

So, how do you look at this vehicle, so to speak? An example of compassionate treatment of the dying? Or, just another occasion for our money-obsessed society to provide an opportunity to profit off of everything? Or, maybe both? It would be interesting if one of you wanted to contact the OID to see what the experience in Oregon has been with VC. They are regulated by state law, even though the National Association of Insurance Commissioners would like to see some national standards on this issue.