The Truth Behind Viatical Settlement Contracts

By Rstaib Posted : 09/20/2004

Viatical settlement contracts allow a person to sell their life insurance policy to a third party in exchange for a reduced amount of its face value. The amount you get back is dependent on your health, age, number of years your policy is in force, and death benefit. A major concern these days is that many life insurance settlement companies purposely try and mislead investors about what kind of return they should expect. They stretch the truth and play with numbers to make viatical settlement contracts sound like the best thing since sliced bread, but really, they are a gamble where you may risk your retirement nest egg on the odds of someone’s life expectancy.

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Viatical settlement contracts are quite risky, so if you are considering purchasing a contract, you should approach it with caution. The U.S. Securities and Exchange Commission (SEC), whose mission statement says it functions to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation, cannot regulate viaticals because they are not considered securities. States are working together more and more in an attempt to address the scam-artist issue when it comes to viatical settlement contracts, and many require viatical companies to be licensed.

One state that has taken a big step against fraudulent viatical contract activities is Florida. In Florida, viatical companies cannot “guarantee” investment returns, brokers are required to be licensed as life insurance agents, as well as to disclose transaction compensation, and if the company is in violation of viatical settlement provisions, they will be penalized.

What is being done to stop fraudulent viatical settlement companies
In an attempt to stop corruption, the SEC has a few suggestions when it comes to requirements for viatical companies:

  • Make a full disclosure of all products
  • Make a full disclosure of all their companies
  • Financial statements for the company and the owners
  • State risks associated with viaticals
  • Make information available to investors

The Schemes

  • Wet Ink. A 'wet ink' scheme is when a healthy person is persuaded by a viatical settlement company to apply for life insurance, then turns around, sells and receives a lump-sum payment. The policy is then resold to awaiting-investors. The ink is barely even dry before it’s sold off again. Wet ink schemes are another way to stimulate insurance fraud, as well as undermining the insurable interest rule.
  • Clean Sheeting. 'Clean sheeting' is a term used to refer to terminally ill people who lie about their medical history to get approved for a life insurance policy. They apply for an amount barely under the limit before a medical exam is required and then once approved, sell the policy off.

Viatical settlement contracts in short
There is no guarantee when it comes to viatical settlement contracts. There are no guarantees on how much you will get back, not many regulations on them and also no data available to track and display the investment performance. A lack of control is what makes these types of investments so faulty—since some states have actual security regulators overseeing viaticals, and others just have the insurance department. As with all kinds of insurances, be sure to read the fine print and understand everything before signing off.

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