Viatical Settlements and Life Settlements

Summary of Viatical and Life Settlements

Viatical Settlement

  • Purpose: Provides financial relief to terminally ill policyowners (viators) with a life expectancy of 2 years or less.

  • Mechanism: A third party purchases the life insurance policy for 60-80% of the face value, providing the policyowner a tax-exempt lump sum and taking over as beneficiary.

  • Risks for Buyer: Financial loss if the insured lives longer than expected.

  • Requirements: Policy must be active at the time of agreement.

Life Settlement

  • Purpose: Allows policyowners to sell their life insurance policy for more than cash surrender value but less than the death benefit.

  • Key Differences:

    • Illness Requirement:

      • Viatical: Terminal illness required.

      • Life Settlement: No illness requirement.

    • Buyer’s Profit:

      • Viatical: Higher profit based on shorter life expectancy.

      • Life Settlement: Broader circumstances, lower guaranteed profit margin.

Key Differences Between Viatical and Life Settlements

Feature

Viatical Settlement

Life Settlement

Illness Requirement

Terminal illness with ≤2 years life expectancy.

No illness requirement.

Seller's Purpose

Financial relief for terminal illness.

Financial flexibility or policy switch.

Buyer's Profit

Based on short life expectancy; higher profit potential.

Longer life expectancy; lower margin.

Tax Treatment

Lump sum is tax-exempt.

Tax implications depend on gain and tax laws.

Summary of STOLI and IOLI

Overview

  • Definition: STOLI/IOLI transactions involve an entity with no insurable interest inducing someone to buy life insurance. The insured assigns ownership to a third party, who becomes the beneficiary, profiting upon the insured's death.

Key Characteristics

  • Insured’s Role: The insured buys the policy and sells ownership to an investor for more than the cash value but less than the death benefit, monetizing their mortality.

  • Investor’s Role: The new owner takes on policy ownership, changes the beneficiary, and pays premiums, collecting the death benefit upon the insured’s death.

Legal and Ethical Concerns

  • Lack of Insurable Interest: Investors have no legitimate relationship with the insured, creating an incentive to profit from their death.

  • Fraud Risks: STOLI/IOLI transactions can lead to fraudulent practices, misusing life insurance for speculative investment rather than providing protection.

Current Regulation

  • Many states have banned STOLI and IOLI due to ethical and legal concerns related to the absence of insurable interest.