Author: Dick Hartzen
Viatical settlements, or accelerated death benefits, were controversial products developed in the 1980s following publicity for the AIDS epidemic. There were touted as a means for terminally ill patients to get money from life insurance policies to pay for medical treatment or other "bucket list" activities. Others viewed them as opportunistic and unethical.
An old Latin word viaticus referred to a journey. In many usages, it was used to discuss a journey to the grave. On June 5, 1981, the Morbidity and Mortality Weekly Report listed five cases of Pneumocystis carini pneumonia. Within 18 months, epidemiologists conducted studies and identified it as Acquired Immunodeficiency Syndrome (AIDS). Further research traced the first case to 1959 in the Belgian Congo.
A major problem arose for many of those who acquired AIDS. Usual work activities may have been curtailed. The person with AIDS had normal living expenses to be concerned with and newly gained large medical bills. Adding these to the realization that life was going to end soon caused many to consider fulfilling some of their life’s ambitions – trip to Europe or buying an item that was always wanted. Finding assets to fulfill these wishes became very important and often futile.
Banks and Savings & Loans were reluctant to lend money to the ill people. Some form of help was needed. Certain firms saw a way to profit from the AIDS proliferation. They offered to buy life insurance policies at a discount. Policies that may have had no cash value (term or policies only a few years old) could be sold for 50-60% of their face value. Other policies may have had a cash value that was insufficient. The Viatical Settlement allowed the AIDS patient to afford medical treatment and fulfill some of their ambitions prior to death.
The general public was outraged at this practice. The rates being charged were deemed usurious. This may have been right, but it was also partly wrong. There was no other help available. Many benefited from this program. One overlooked problem involved taxation. At first, IRS ruled that any money received that exceeded the premiums paid was taxable income. This has been changed and no longer results in a tax consequence. It is now ruled as a pre-death benefit.
The negative from the insured’s viewpoint was the decrease in the death benefit.
Viatical company offers were made to investors from the public. If someone invested with the company, there was a chance that a large return could be received in a short time. The viatical settlement involved underwriting. The insured usually had to show that death would follow within a year or two. Some investors found out that death did not occur within the time expected. Many insureds lived far beyond the expectation and investors lost the use of needed funds. One investor was interviewed on a television program and noted that she kept praying for the AIDS patient’s death to occur soon.
Insurance companies saw this important fact.
A great public relations opportunity was available. The insurer could become a form of viatical settlement company. They could offer some of the insurance proceeds now (usually 50-60%) and pay the balance upon the death.
To assure that their program would not be compared to a viatical settlement, they called it many different terms: Accelerated Death Benefit, Advanced Death Benefit and other similar titles.
The operations of this benefit differed greatly between insurers. Usually, the insured now had some of the money that was needed along with a non-reduction in benefits for a term. Premiums may also be waived. If death did not occur in a certain time frame (one or two years), an interest charge may be levied against the settlement.
The qualifications for this benefit differ. Death must be imminent, but the time frame varies. The cause of death covered against can arise from many named conditions (cancer, AIDS, heart conditions, etc.). This rider is automatically a part of many new policies. It usually can not be added to an existing policy.
Copyright 2010 by Richard I Hartzen. Used with permission.
Last Updated: April 26, 2024
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