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A Senior Life Settlement or a Viatical Settlement is the purchase of an in force life insurance policy by a third party prior to the death of the insured policy holder. The third party purchaser then becomes the new owner and beneficiary of the in force insurance policy (the owner usually has the right to designate the beneficiary of the policy and to change the beneficiary at any time) and will receive the death benefit paid at the time of death of the policy holder. As the new owner, the purchaser is also responsible for the payment of all future premiums.
The price offered to purchase the policy and agreed to (compensation) is usually at a discounted value less than the actual death benefit but more than the cash surrender value. This usually results in a lump sum payment to the seller of the policy.
Conversely, the purchaser of the insurance policy performs an analysis model to determine that the expenses related to the policy purchase price, duration and total amount of the annual premium, and the administration / servicing is an amount less than the anticipated death benefit that is sufficient enough to provide a specific return on the investment. The return depends upon the seller's life expectancy and the actual date he or she dies. If the seller dies prior to the estimated life expectancy date, then the investor may receive a higher return. However, if the seller lives longer than the actuarial forecast date, then the return will be lower. The investor can even lose a portion of the principal investment if the seller lives for an extended length of time such that additional premiums not anticipated in the model must be disbursed in order to maintain the policy. The same conditions apply to any type of financial instrument / securitization with underlying life or viatical settlements as the asset pool.
Permanent insurance has no maturity of the coverage just as long as the policy holder continues to pay the annual premium on time. This type of policy also has several other names that it is often referred to such as whole life, ordinary life, universal life, adjustable life and variable life. The annual premium of a whole life policy usually remain constant during the life of the policy. A universal life policy usually does not have a schedule of premium payments and they can be made to cover several years in advance. A variable life policy does not have a guaranteed pre-determined death benefit amount. Rather the death benefit (and surrender value) are dependent upon the performance of the financial investments that the premiums are invested in. These policies allow the owner to build up some equity and have a feature known as "cash value" or "cash surrender value" that allows the policy holder to terminate the policy (surrender) and then receive a percentage of the face value death benefit, or if the policy generates dividend income then the income can be used to cover a portion of the annual premium, or a loan against the surrender value can be structured to cover the annual premiums.
The minimum age of the insured usually must be 65 years or older.
Whey would a policy holder sell an insurance policy? Well it makes sense when a senior executive employee (key man policy) of a corporation ("non-natural person" owns the policy) retires. By selling the policy the company, can recoup all or or a portion of the premium expense. It also makes sense When a person is re-evaluating their estate planning. For instance, the beneficiary of the policy may have passed away or the beneficiary is no longer involved with the policy holder as the result of a divorce. Similarly, it may make sense if the person is considering purchasing new insurance coverage, such as long-term care coverage.
There are instances where a person's financial situation has changed and either the life insurance premiums become too expensive to continue to make the payments or the lump sum payment would be of benfit now. Similarly, When the policy may be approaching a lapse or surrender (at a nominal cash surrender value) it may make financial sense to sell it.
The potential sale of the life insurance policy is most often contemplated When there is a change in the policy holder's health condition but it is also the most controversial situation. A sale under these circumstances is interpreted as a forced sale of an asset by a person facing substantial medical bills and their own mortality.
Providers are the life settlement companies that purchase the in force life insurance policies (provide the funds to complete the purchase of the individual policy) and participate in the secondary market. Providers may have their own capital or source of capital. The providers that source capital may either selll fractional interests in the individual policy settlements to the investors (and retain the servicing) or they can assemble a pool of settlements for securitization.
When considering the purchase of life insurance policies as an "asset", investors have determined that it has a very low correlation to other assets and /or market risks (for instance, a change in interest rates does not affect the health of the insured person).
The insurance industry has statistics on how many policies lapse, which in turn is utilized to determine how much the insurance company may have to pay out in death benefit claims in the future. However, if policies are no longer being allowed to lapse due to the settlement and the continued payment of the premiums by the investor then the insurance companies may have a higher rate of death benefit payouts then had been anticipated, and the companies may have to increase premiums in order to cover higher than expected payouts.
When the sale of the insurance policy is by a a terminally ill person (viator) with a life-threatening or catastrophic illness or condition (life expectancy is less than teo years) then the sales are arranged by either a viatical settlement company (provider) or a viatical settlement broker (who either purchases the policy themselves or sells it to a third party investor).
In the United States, these sales are regulated in 34 states and in the territory of Puerto Rico. For instance, in the State of California a Viatical Settlement Provider's License is required to assist the viator in considering the sale of a life insurance policy, purchase the life insurance policy or to sell investments in viatical settlements.
A cash settlement that involves an insured that does not have a catastrophic or life threatening illness may fall outside of the respective state's regulatory authority but one must carefully check the sate's current law.
The actual underwriting is a longevity analysis / life expectancy analysis of the policy holder, which determines the price the provider / investor will pay for the individual's life policy. The analysis combines medical underwriting with mortality tables to determine an accurate life expectancy estimate. In the United States the underwriting function is dominated by three companies (they actually do the work for a fee or a provider utilizes their software application): 21st Services, American Viatical Services (AVS) and Fasano & Associates.
Like any asset that generates a steady payment stream, senior life settlements and viatical settlements can be pooled into an asset-backed security. The distinction between the two types of settlements is related to the licensing and regulations regarding the acquisition of the individual policy. Thus, both types of settlements can be co-mingled in a securitization.
A financial institution is necessary to act as trustee / custodian, escrow agent and verification agent for the life settlement securitization. A separate entity can function as the collateral manager and this entity will provide the monthly reports to trustee and investors, surveillance reports, as required by rating agencies, and annual audited GAAP financial reporting.
The securitizations are rated by a third party just like any other asset-backed issue. At A.M. Best Company, the Insurance-Linked Securities Group is responsible for rating insurance-linked securitizations such as life settlement securitizations. Some other securitization have received a rating from Standard & Poor's and DBRS.
The market value of the securitization would be affected by the types of illnesses the underlying insured persons have and whether developing pharmaceutical, therapeutic or sugical technologies and procedures will prolong the life of the insured persons.
The market value of the securitization would also be affected by the financial strength of the insurance companies that underwrite the life policies.
Alaska Viatical Settlement Regulations www.commerce.state.ak.us/insurance/pub/AC31VIAT6.pdf
Centers for Disease Control and Prevention (CDC), The State of Aging and Health in America 2007 Report www.cdc.gov/aging/saha.htm
International Society of Life Settlement Professionals (ISLSP) www.islsp.com/
