Viatical and Life Settlements – Selling Your Life Insurance Early

Early in the twentieth century John Burchard was alive, but not for long. He was ill and in need of surgery that he could not afford. John had one asset though, a life insurance policy. Though worthless to him, if he could sell it he could get the money he needed, but how much was a life policy on a dying man worth? About $100, as it turns out. Mr. Burchard sold his life insurance policy to a Dr. Griggsby for that $100, and the good doctor would have to maintain the premium payments from then on.  I assume (but do not know for certain) that Dr. Griggsby was in a position to understand John’s situation, but was not John’s doctor or surgeon. Unfortunately, Mr. Burchard died shortly thereafter and Dr. Griggsby, now owner and beneficiary of the policy, asked for his payment.  The insurance company said “NO,” and sighted reasons why they did not have to pay. The doctor disagreed and off went the whole bunch of them to court (except John, who did not care anymore, on account of his being dead).

On a cold day in 1911 the Supreme Court of the United States sided with Dr. Griggsby. (I really have no idea if it was cold, but the date was December 4th, 1911 and DC is cold that time of year.) The court declared that a life insurance policy has value and is an asset and can is transferable for value. The court, in declaring the transaction between Mr. Burchard and Dr. Griggsby legal, created a new branch of the life insurance market: the Viatical (or Life) Settlement market.

The concept is simple; Mr. Adams owns a life insurance policy which he and his loved ones do not need and he is either terminally ill, very advanced in age, or both. For this example we’ll say the policy has a face value of $100,000. Now Adams would like to use some of that money before he dies. Maybe he wants to pay for an experimental medical procedure, or just wants to buy a really cool car before he kicks off.  On the other side of the equation is Mr. Baker. Mr. Baker has about $75,000 he wants to invest and is willing to take on some risk for a potentially outsized return. Between these two players stands a life settlement broker who puts the deal together in a way that Mr. Baker and Mr. Adams do not know who the other party is. Mr. Adams walks away with $75,000, and Mr. Baker will get $100,000 when Adams dies. If Mr. Adams and his advanced illness cooperate and he dies in a year or two it is a pretty good return for Mr. Baker.  The risk is that Mr. Adams doesn’t pass on. If he somehow survives Mr. Baker may be waiting a long time for a return on his investment. Of course, Mr. Adams gets to live with the thought that somewhere out there is a guy who would really like him to die already. At least he can take comfort that though there have been occasional information security problems, there is no record of someone being murdered for a viatical settlement.

Those are the basics. The rule of thumb is that if the insured is expected to die soon (within two years) then it is called a viatical, if longer then the deal is a life settlement.  There are significant complexities, costs, and tax issues with these deals; make sure you fully understand the pros and cons before signing the check (or signing over a life insurance policy). The most important point for you, whichever side of the ghoulish equation you want to be on, is to work with a reputable broker.  Check out your middle man. When these deals work as they should, the situation is a win-win for everyone involved.

About the author

Jim Heitman, CFP®

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