Viatical Investment Pros and Cons

What is a Viatical settlement?

In a viatical settlement, an existing life insurance policy is sold by the current policy owner to an investor for cash.  To be considered a viatical settlement rather than a life settlement, the insured is terminally ill, usually with a life expectancy of fewer than two years.  An investor purchases the beneficiary and ownership rights to the policy and will take over policy costs.  In return, the policy owner receives cash now.

What is a Viatical Investment?

Investing in an existing insurance policy insuring the life of a terminally ill individual is a viatical investment.  You are purchasing the rights to the death benefit of a policy and taking over policy costs in a transaction referred to as a viatical settlement.  This type of investment often yields a higher rate of return than many other investments although you will not receive this return until the insured passes away.  Not everyone can invest in viaticals.  You must be an accredited investor. 

How Do I Invest in Viaticals?

Accredited investors are defined by Rule 501 of Regulation D in the Federal Securities Act of 1933 and you must meet this requirement in order to invest in viatical settlements.  If you qualify as an accredited investor, you should speak with a life settlement company to find out about investing in viatical settlements or life settlements.  It is possible to become the owner of a policy or own an interest in a single policy or in a portfolio of policies. 

Things to Consider

Before buying a policy in a viatical settlement, investors must have the policy valued as precisely as possible. The health of the insured is examined through existing medical records.  This, along with actuarial tables, allows a projection of the life expectancy of the insured to be made.  Most times, third party companies provide a life expectancy report.  Illustrations are also examined to determine cost of insurance.  These items are used in calculations assessing the value of the policy.  An investor will make an offer based on this value that will be appealing to the policy seller while still allowing them to earn a suitable risk-adjusted rate of return. 

Possible Pros and Cons

Life expectancy is one of the most important factors affecting policy value and it is not possible to predict with 100% accuracy.  If it takes longer to collect on a policy than projected, a lower rate of return will be achieved as you will have to pay in more overtime in policy costs.  Your return may be higher than projected if the insured dies earlier than expected though.  Many other factors can cause the actual rate of return to change prior to the maturation of the policy.

Life settlements and viatical settlements are not liquid investments.  Although it can be possible to sell your investment in a policy or portfolio, it can be difficult.  If a situation arises in which you need funds quickly, your viatical investment is not going to provide a quick cash option.

Although rare, the following scenarios can happen, so must be considered.  If fraud is suspected, an insurance company may not pay the death benefit.  This is usually based on information provided by the insured in the original application for insurance.  Additionally, if an insurance company were to go out of business, it is not guaranteed that you would receive full benefits although there are state funds set up to protect policy owners.

Consult with experts in the life settlements field before investing in viatical settlements.  You should also consult the SEC and any other regulating bodies in the life settlements industry.  Weigh the positives such as high rates of return and negatives such as life expectancy uncertainty when making your viatical investment decision.