Viatical investments

1

Hi, Brandon,

I am not clear with viatical investments. Do you have any examples on that? Please advise.

Thanks

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Hey @A11, nice to hear from you.

Here’s a blurb about viatical settlements. This is from our chapter on life insurance as it relates to the Series 66.

In some circumstances, the policy holder can sell their life insurance to a third party. Known as a life or viatical settlement , this type of transaction is typically tied to a policy holder near death. In particular, people diagnosed with terminal illnesses routinely utilize these types of settlements. If a person knows they’ll die within a short period of time, they can sell their life insurance to a third party and potentially use the funds for medical or end-of-life expenses. For example, a $500,000 life insurance policy might be sold for $300,000. The third party takes over the responsibility of paying premiums and will receive the total death benefit ($500,000 in our example) upon death of the original policy holder.

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Thanks, Justin. I am working on 66, just passed 7 more than a month ago. Thanks to you and Brandon, for sure.
Back to viatical settlement, it sounds like Executive Bonus or Buy-Sell type of arrangements, but it is not. Am I right?
The buyer and seller may not know each other. Is that correct?
Who will pick up others’ life insurance and pay for the rest of the payment? Just make no sense. What will be the risk for this type of securities?

Please help. Thanks.

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4

Congrats on your 7 :slight_smile:

I don’t have experience with viatical settlements myself, so unfortunately I can’t add much detail here other than what we already have in our material.

@brandonrith can you chime in if you have a sec?

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Hi @A11! Great questions on viatical settlements.

If you’re referring to executive bonuses for an officer or director or a company, then no. In my experience, I’ve never heard of an executive receiving a viatical settlement as compensation, although it’s theoretically possible. Buy-sell agreements are typically in reference to ownership of a business after a business owner dies. They don’t fit there either.

Think of a viatical settlement as a bizarre & morbid way of investing. The buyer and the seller typically do not know each other. In my experience, a person with life insurance covering them until death (whole, universal, variable, or universal variable) gets in touch with a company specializing in these settlements. The company then acts as the “middleman” between the seller (the one owning the life insurance) and a potential buyer. If the policy is sold, the company receives compensation in some form. Coventry Direct is an example of a company that does this.

The buyer pays a lump sum, which will be less than the death benefit, and also becomes responsible for paying the premiums over the life of the covered person (the seller). For example, let’s say the death benefit is $500,000, and they offer a $300,000 lump sum to the seller. From there, they’ll take over premiums. Let’s say the premiums are $200/month ($2,400/year), and the covered person lives 10 more years. After 10 years, $24,000 in annual premiums have been paid. In the end, the buyer paid $300,000 plus $24,000 in premiums, resulting in a “basis” of $324,000. Upon death, they receive the $500,000 death benefit, resulting in an overall $176,000 profit.

The risk of this type of investment is mortality risk. If the covered person lives longer than expected, the buyer still must make those premium payments. The longer they live, the lower the profit for the buyer.

I hope this helps! Please let me know if ytou have any questions.

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A few more things - it’s possible to get involved with a viatical settlement even with term life insurance (provides coverage for a specific term, e.g. 10 years). This would be an even bigger risk for the buyer. If the seller (the covered person) outlives the term, the buyer receives no death benefit. In this situation, they would’ve paid a lump sum to the buyer and received nothing in return.

Given the risk of this type of event occurring, the buyer would want to ensure the seller was terminal. Plus, the lump sum for this type of viatical settlement would likely be smaller than one for life insurance covering an entire lifespan.

While these agreements are predicated on death, they really can be “win-win” situations for both parties. The seller can collect a lump sum and use that money while they’re alive. This can be especially useful if medical bills or other costs are piling up and they don’t want to leave family members with outstanding debts. It’s also an alternative and unique investment opportunity for the buyer.

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That makes total sense. so I presume this should be in a private placement then!?

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Not technically a private placement, for two reasons. First, most forms of life insurance are not securities. Term, whole, and universal are non-security insurance products, and therefore aren’t considered being sold in private placements.

Second, those that are securities (variable and variable universal life) are registered. As you may recall, variable insurance products are subject to SEC and state registration. Private placements only cover the sale of unregistered securities to private audiences.

For test purposes, you’ll likely only need to know the basics of a viatical (life) settlement. Here are the key test points to remember:

  • Buyer is purchasing life insurance contracts from an insured person
  • Buyer pays a lump sum, plus pays life insurance premiums
  • Seller receives lump sum, but their original beneficiaries no longer receive death benefit
  • These are most often utilized when an insured person has a terminal disease or illness
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Thank you, Brandon. That’s very clear. I have never encountered such a thing. It’s so complicated. Thanks again for your coaching.

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10

Interesting read here… And convoluted! Thanks for breaking it down!

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