Financial Services News

"Viatical Settlements:" Financial Peace of Mind for Terminally Ill

Like many individuals living with a serious illness, Ronald Yuze wanted to focus on the people and things that were most important to him. Yet high medical bills and other expenses made it difficult for him to do so. fortunately, he was able to turn to an increasingly popular service known as a "viatical" settlement. Through it, he was able to sell his life insurance policy for a percentage of its total face value. For him, the money offered more than resources ... it offered a sense of hope.

Being diagnosed with a serious illness is a situation that no one wants to contemplate. But statistics show that each year one out of every 1,000 people face a terminal illness. Learning that we, or someone we love, has a terminal illness is the beginning of a journey, one for which we are often unprepared.

What is a viatical settlement?
A viatical settlement allows individuals who have a reduced life expectancy due to a serious illness or chronic disease, or who are over 75 years of age and have complicating health problems to sell all or part of their life insurance policy for cash.

History of viatical settlements
The viatical industry emerged in the 1980s, primarily to serve the AIDS community. During the past two years, the industry has entered the mainstream due to increased consumer awareness and the passage of the 1996 Health Insurance Portability and Accountability Act.

The viatical market place has two different groups of practitioners: providers and brokers. Providers are companies that provide the capital for policy purchases, determine life expectancy and interface with the insurance carriers. Brokers serve as intermediaries between the providers and the clients.

Viatical settlements should not be confused with viatical loans. Settlements provide cash to the individual based on the face amount of their life insurance policy. Once a settlement is reached, the individual is no longer responsible for making premium payments and may use the cash for any purpose. A viatical loan requires the heirs to repay the cash taken from the policy after the death of the individual, often with substantial interest added to the cash loan.

The viatical settlement industry is regulated by state insurance departments with guidance from the National Association of Insurance Commissioners (NAIC). NAIC has set minimum pricing guidelines to protect the consumer, and has established standards in the industry for evaluating reasonable payments to the individual.

Tax-free status
The Health Insurance Portability and Accountability Act passed in 1996 allows viatical settlement proceeds to be free of federal income tax for two groups: terminally ill individuals with a life expectancy of fewer than 24 months; and chronically ill individuals who have been certified within the previous twelve months by a licensed health care practitioner to meet criteria established by the act.

To qualify for the tax-free status, the transaction must be conducted with a viatical settlement provider licensed in the state of residence of the client. If no state licensing requirements exist, the transaction must meet NAIC's general rules and disclosure requirements.

Access to and use of funds
Most people learn of viatical settlements through their caregivers or through referrals from support groups, employers or trusted intermediaries such as nurses.

Viatical settlement proceeds can be used for any purpose. Some use the funds for pure necessities such as mortgage payments, medical bills and supplies not covered by insurance. Others fulfill life dreams or travel to be closer to family members.

According to the American Medical Association, more than 33 percent of families spend most or all of their assets when a family member contracts a terminal illness. In nearly 20 percent of these cases, a family member was forced to quit his or her job to provide care to the individual. These financial burdens can be eased through the use of the viatical settlement. Since a viatical settlement gives individuals access to all or part of an insurance policy, the client can determine whether or not to leave a portion of the policy for his or her heirs.

NACo Financial Services Center Program
Through the Insurance Center for Local Government, NACo's Financial Services Center (FSC) has competitively selected Viaticus, Inc., a CNA company, to provide viatical settlements to counties and their employees.

Viaticus does not re-sell the policies it buys, thus ensuring confidentiality, and provides the county employer with complete services, thus avoiding any expenses by the county human resources department.

For more information, contact the NACo Financial Services Center or the Insurance Center for Local Government at 888/889-4254.

(Financial Services News was written by Steve Swendiman, FSC's managing director.)