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Viatical Settlement Contracts

What is a Viatical Settlement?

The word "viatical" is derived from the Latin word "viaticus" which means "provisions for a long journey." A viatical settlement is the sale or transfer of a life-insurance death benefit by a terminally ill insured person ("viator") to another person or company prior to the death of the viator. Sometimes one of the few assets a terminally ill person has is a life insurance policy, and to help pay expenses, the terminally ill person will sell this life insurance policy to an individual or company in order to pay for medicines or other needed expenses.

Typically, the person or viatical settlement company acquiring the life insurance policy death benefit pays the viator a discounted amount of the actual death benefit, and becomes the irrevocable beneficiary of the life insurance policy, receiving the full amount of the death benefit upon the death of the viator. Increasingly, business firms are buying life insurance policies of the terminally ill and re-selling them at marked-up prices as investments.

Viatical Settlement Terminology

The following are viatical settlement contract terms you should be aware of:

Face Value/Death Benefit:
The amount of money to be paid by the insurance company to the beneficiary upon the death of the insured.
The person or company who will receive the proceeds of the insurance policy once the insured or viator has died.
A person whose life is insured by a life insurance contract or certificate who wishes to sell or has sold the beneficial interest in his or her life insurance contract for a lump sum.
Viatical Settlement Contract:
An agreement between a viator and a viatical settlement provider or company [see below] to transfer the life insurance death benefit of the viator in exchange for money, typically for an amount of money less than the total death benefit of the policy.
Viatical Settlement Provider/ Viatical Settlement Company:
A person or company that buys death benefits of life insurance policies from individuals for less than the expected death benefits, for the purpose of reselling them or who arranges for such purchases. Viatical settlement providers then sell the death benefits, at marked-up prices, as investments to individuals who expect to receive profits upon the deaths of the viators.
Viatical Investor:
A person who purchases either directly from the viator or from a viatical settlement provider the death benefit of a life insurance policy, or a fractional interest in such a death benefit, or an interest in a pool of such death benefits or fractional interests. More recently, such investments have been sold in the form of interests in companies, such as "limited-liability companies," formed for the purpose of buying viaticals.
Fractional and Pool Interests:
Some viatical settlement providers take a large life insurance policy and fractionalize its death benefits, selling the fractional pieces to multiple investors. They can also create a pool of viated policies and then sell fractional interests in the pool to investors.
Contestability Period:
Conditions set by an insurance company in which the company can contest the payment of a death benefit or cancel the policy should the insured die within a certain time period or under certain conditions, or should the policy have been obtained fraudulently. Typically the time period in which an insurance company can contest an insurance policy is two years.
"Wet Ink" Policy:
A newly issued life insurance policy that is within the Contestability period.
Clean sheeting:
A fraudulent practice that involves obtaining life insurance by submitting an application that hides from the insurance company an adverse fact-for example, the fact that the applicant has a terminal or life-threatening illness.
Escrow Company:
A company sometimes affiliated with or owned by the viatical settlement provider, which is set up to receive investment money from individuals for the purchase of viatical settlement contracts and which is to hold insurance policies purchased from viators. Often escrow companies pay the premiums on such policies and pay the proceeds to the investors upon death of the viator. It is important for the potential investor to investigate fully the credentials of the escrow company and any links which may exist between the escrow company and the viatical settlement provider. Recent apparent fraud has involved disappearances of such escrow companies or their personnel and the investors' funds.

Investing in Viatical Settlement Contracts

Viatical Settlement Contracts are now being sold as securities, and although there is nothing inherently wrong with investing in viatical settlements, potential investors need to be aware of a few basic facts and the differences between viatical settlements and other types of securities.

The first thing to remember is that most often the investor in a viatical settlement contract is dependent upon the viatical settlement provider, or another party selected by the viatical settlement provider, to see to it that the viatical settlement contract and the underlying life insurance policy is maintained. This involves anything from determining the life expectancy of the viator to maintenance of the life insurance policy, (i.e. paying premiums and filing for the death benefit upon the death of the viator.)

Most states consider a viatical settlement contract which is sold or packaged as an investment, as a security and regulate these investments as such. As with most securities, there are risks involved. Too often those risks are not adequately disclosed to the investor. Unfortunately, recent experience has shown that there are many instances of fraud in the new viatical industry. This brochure is intended to help you learn what you need to know as you consider making such an investment.

As always, anyone considering investing money in any security should thoroughly research the product, the individual, and the company offering the security. Don't let a polished sales technique, high-pressure sales tactics and promises of huge returns keep you from researching the investment and the person or company offering it to you.

Example of a Viatical Transaction

Sam Jones has been diagnosed with a terminal illness and his doctors have given him less than two years to live. Sam holds a life insurance policy worth $100,000, which he has owned for more than 20 years so there are no Contestability issues. Because of the cost of his medicines, which are not covered by other insurance, Sam is in need of additional cash to cover medical costs. Sam (the viator) decides to sell his insurance contract to Viatical Sales, Inc. (the viatical settlement provider). Because of the nature of his illness and his life expectancy, Viatical Sales Inc. gives Sam $70,000 and he makes Viatical Sales Inc. the irrevocable beneficiary of his policy. Viatical Sales Inc. will receive the full $100,000 upon Sam's death.

Viatical Sales, Inc., in turn, offers to sell shares of Sam's policy to individual investors. The investors purchase increments of the whole policy from Viatical Sales Inc. for a discounted price to cover what Viatical Sales Inc. paid, plus additional expenses to cover administration and premiums. Viatical Sales, Inc. will continue to pay the premiums for Sam's policy and will cover the administration expenses which include tracking Sam to determine when he has passed away. Upon Sam's death Viatical Sales Inc. will file the claim with the insurance company and pay the proceeds to the investors.

Questions You Should Ask

As an investor you need to be aware of several things prior to investing in a viatical settlement contract, in a pool of such contracts or in any venture investing in such contracts. You need to ask some very important questions such as:

  • Have you thoroughly researched the viatical settlement provider or promoter offering the investment, and the agent offering to sell you the investment? Are they rated by any rating services and what is their financial condition? What are the backgrounds of the people who control the viatical settlement provider or company, including business history, and are there any complaints filed against them? If so, what are they?
  • Is the viatical settlement provider and the agent licensed to do business in Wisconsin as a securities broker-dealer or securities agent? (You can call 800-47-Check, 800-472-4325, to find out.)
  • Is this investment suitable for your portfolio? For example, can you afford the risks involved? (See below.)
  • Does the viatical settlement provider permit early return of all or part of your investment in case of an emergency? If not, can you afford to have your money tied up longer in the event that the viator exceeds the projected life expectancy? Typically viatical settlement contracts are illiquid, meaning that you cannot get your money back until the viator dies. One of the major problems with many viatical investments is that increasingly terminally ill viators outlive their projected life expectancies, thus radically reducing the anticipated profits [rate of return] to the investors.
  • What documentation have you received about the viator[s]?
  • Does the viatical settlement provider have viated policies in hand or contracts to purchase insurance policies? One of the abuses in this new industry is the sale of viaticals and collection of investors' money when the viatical benefit provider or company has not purchased sufficient life-insurance death benefits to meet its obligations to the investors. In some cases investors' money has been found to be sitting in the promoters' bank accounts, earning no returns for the investors.
  • Does the life-insurance policy have any exclusions or is it contestable by the insurance company? Another abuse in this new industry is the purchase of contestable policies followed by sales to investors with no disclosure of the risks involved. This includes the sale of "wet-ink" policies obtained by some viatical settlement providers paying people to acquire life insurance policies fraudulently.
  • If the insurance company detects such illegal activities, the company will cancel or refuse to pay off the policy. The same is true for the sale of viaticals in which the policies were "clean sheeted"-obtained from the insurance companies without full disclosure of the medical condition of the viators.
  • What are the fees and commissions charged by the viatical settlement provider and agent? Sometimes these are very large, and too often they are hidden from the investors.
  • How does the viatical settlement provider track and reports to you the status of your investment? This involves tracking and reporting upon the condition of the viator[s]. Who is responsible for filing death certificates and claims with the insurance company?
  • Who is responsible for paying the premiums of the life insurance policy or policies, and when are they due? If it is the viatical settlement provider or a trustee, what do you really know about the entity's background and business record? Failure to pay premiums could lapse the insurance policy and jeopardize your investment.
  • Who issued the life-expectancy estimate? Is he or she a licensed medical doctor? Did he or she actually examine the viator, or merely review a report?
  • Who becomes the beneficiary of the life insurance policy on the records of the insurance company, you or the viatical settlement provider or a trustee? If it is the viatical settlement provider or a trustee, what do you really know about the entity's background and business record? Is the beneficiary designation in fact irrevocable?
  • Who actually receives the death benefit from the insurance company upon death of the viator-you, the viatical settlement provider, or a trustee? How and when are death benefits to be paid to you? Are any further costs or expenses to be deducted prior to payment?
  • Have you consulted with trusted legal and investment advisers, unaffiliated with the viatical settlement provider or the sales agent, regarding tax and other legal and practical implications of investing in a viatical settlement contract?
  • You should not invest in any viatical-related investment until you have this information, including all such information from the viatical settlement provider or company in writing.

Tips to Remember

  • Viatical settlement contracts are a relatively new investment vehicle, and as such they are not yet as well regulated as other investments.
  • Be wary of "guarantees," and "high return on investment" promises.
  • Don't be pressured into acting, and do not invest until you are comfortable that a viatical settlement investment is right for you.
  • Please feel free to contact the Wisconsin Department of Financial Institutions Division of Securities at
        (608) 266-2139 or
        800-47-Check (800-472-4325) to find out more on this subject. Or you may write to:
        Dept. of Financial Institution
        Division of Securities
        PO Box 1768
        Madison, WI 53701-1768


Some additional sources of information on investments and investment scams: