Wednesday’s Word: Viatical Settlements

Ben Dell’Orto Fall 2018 IAC Student Intern

Even in the cutthroat world of investing, it doesn’t get much more morbid than “betting on death.”

A viatical settlement, also called a life settlement, is an investment where the purchaser buys a person’s life insurance policy. The insured individual needs money, frequently for a medical treatment, and accepts a sum less than the value of the policy from the investor. The investor also doesn’t necessarily have to purchase the whole policy, as brokers often split the policy among multiple investors, allowing investors to minimize risk by purchasing a smaller portion of several policies.

However, figuring out the value of the settlement can get tricky.

If the insured is expected to live for a long time after accepting the settlement, the value of the settlement will be lower since the investor will have to pay the premiums on the policy until the insured’s death. If the insured is ill, as is often the case, the settlement will be higher, with less time required to maintain the plan. Actuaries working for the life settlement provider calculate the life expectancy of the individual.

Viatical settlements carry considerable risk. If the insured lives much longer than anticipated, the investor loses some, or all of her investment. With advances in medical technology, people exceeding their life expectancy has only become more frequent.

To make things riskier, information about how life expectancy is calculated is often secret, and since the companies making these calculations typically do not have to register with the state or federal government, they are not subject to government supervision. With the life expectancy calculation critical to the success of the investment, investors should be wary.

Fraud has also been alleged in viatical settlements, with one instance allegedly leading to victims losing $837 million.

Death is a certainty. A high payoff through investment in viatical settlements? Not so much.