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Viatical settlement may be a helpful option for many people with HIV
Your Benefits and You

by Jacques Chambers

November 1998

The viatical settlement industry, those investment companies that buy life insurance policies from people with a "terminal" illness, are becoming more active than in recent years. They can still provide needed cash to someone with HIV/AIDS.

The industry went into a downward spiral with the introduction of protease inhibitors and more effective "cocktail" treatments. The resulting increase in life expectancy soured investors in this industry who had been promised exceptionally high rates of return on their investments.

As a result, several viatical settlement companies closed their doors. Those that remained were much more cautious in their buying which, translated to people selling their policies, meant lower prices for those policies.


Viatical industry revival

The good news for someone interested in selling a life insurance policy is the industry is starting to come back. The companies feel they have better data on the success and failure of new treatments so they are more willing to bid higher for policies they want to buy. Investors are returning so there is more capital with which to buy the policies.

These companies have also started to realize that AIDS will not always be considered a "terminal" illness so they are starting to expand their markets. They are currently actively seeking business from the elderly as well as from cancer patients and others with life-threatening diseases.

The federal tax exemption passed into law effective Jan. 1, 1997 has helped increase interest in people selling their policies. In addition, several new, fairly aggressive companies have become licensed to do business in California which has heightened the competitive climate.


Exercise caution

People wanting to sell their life insurance policy, however, still need to proceed with caution in certain areas.

The basic rule of viaticating a life insurance policy has not changed. Get competing bids, and not just several bids from one broker. One client recently sent information to two brokers. One gave a bid of $51,000 for his $98,000 policy. The other bid a couple of thousand dollars higher. Going back and forth between the two brokers, he ended up selling his policy for $61,500.

This might not happen in every single case, but you can be sure that the first bid you receive from a company can almost always be improved upon. And the best way to do that is with a competing bid.


Point-of-sale tips

There are other things, however, to be done at the time of the sale. First is the manner in which you are to be contacted. Once a policy is sold the buying company will want to keep in contact with you. Why? To know "when the policy matures" which is insurance language for "when you die." As morbid as the idea is, their money is tied up in your policy and they have a right to know when they can recoup their money.

But let's be honest. There is no way these companies can call every month or every quarter and there is nothing polite or caring they can say that can hide the reason for their call which is ... well, you know what they want to know. And regardless of how good you are feeling, it's not going to help your positive outlook to hear from them "checking on your health."

Your opportunity to control such "follow-up" calls ends once the sale is completed, so that is the time to negotiate any alternatives to the personal phone call.

You can propose alternatives and, once agreed upon, have them put it in writing at the time of the sale. Alternatives could be any or several of the following:

With either of the latter, make sure you get the contact's permission as well. One note of caution, AIDS service organizations and their staffs are generally prohibited from even acknowledging you as a client, much less reporting the status of your health.


Get it in writing

It is wise, also, for the person selling their life insurance policy to collect the necessary documents to justify the income tax exemption should there be a tax audit. The law allows an exemption from federal income taxes provided two conditions are met.

First, the life expectancy of the person viaticating, the viator, must be two years or less. Congress added this requirement to limit the benefit only to the seriously ill and to prevent the development of a life insurance futures market. In the absence of regulations, the industry generally believes it is sufficient to have a letter in your files from a physician estimating your life expectancy to be less than two years. No guarantee; just an "estimate."

Second, if the state requires licensing as California does, the policy must be purchased either by the issuing company through an Accelerated Benefits provision or by a licensed viatical settlement company. Here it is recommended that you obtain a copy of their California license for your files. This would be the license of the company with whom you actually sign the sales contract, not necessarily the broker through whom you found the company.

Keep both the physician's letter and the copy of the license with your tax records so they will be easily available if you need to justify the exemption to the Internal Revenue Service. Note that these are simply suggestions based on the general beliefs within the industry and should not be construed to be tax or legal advice.


If you invest, invest wisely

Finally, some people are selling their policies before there's an actual need for the money.

In the past, it was always recommended not to sell as the policy usually gained in value as one's health declined faster than any investment would. Now with new treatments available, some people are selling early, thinking they won't get a better price.

While such a belief may or may not be a little premature, if you do sell the policy and need to invest the funds somewhere, these probably aren't the funds you want to put somewhere with a high risk of loss, regardless of how good a rate of return is promised.

If you aren't knowledgeable in investing, get professional help. Financial counselors and planners who will provide services free of charge are available at most financial brokerage houses. There are also fee-only financial planners who do not receive commissions but will charge you a flat fee of $80 to $125 per hour for their advice. If you are investing your last $50,000 and it must last you the rest of your life, $200 or $300 can buy you a lot of confidence in your choices.

For a list of current California licensed companies and information on selling your life insurance policy, contact AIDS Project Los Angeles' Benefits Program at (323) 993-1473 or (323) 993-1474.


This article has been reprinted at The Body with the permission of AIDS Project Los Angeles (APLA).




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