Investing in viatical settlements is a way to earn a return on your money that is not dependent on market conditions. You do not have to worry about a steep decline in the stock market reducing your net worth and you do not have to try to predict when the Federal Reserve will stop tapering. Interest rates, the value of the dollar and other economic and political events do not matter when you invest in viaticals.
Exactly What is a Viatical Settlement?
A viatical settlement is a financial transaction where the owner of a life insurance policy (Viator) sells the policy of an insured to a buyer (viatical settlement provider) in the secondary market for life insurance. The seller receives a lump sum payment based on the value of his or her policy, which is less than the face value of the policy, but substantially higher than the surrender value that the seller could get by exercising that option with his or her insurance company.
The buyer of the policy becomes the new owner and beneficiary of the policy and is responsible for making any premium payments due on the policy to keep the policy in force until the death of the insured. Upon the death of the insured, the death benefit is paid to the owner(s) of the insurance policy.
Can Anyone Invest in Viaticals?
Investing in viatical settlements is not an option available to everyone. In order to invest in viatical settlements, you must be an accredited investor as defined under Rule 501 of Regulation D of the Federal Securities Act of 1933.
You need to be an accredited investor because there are specific risks that individuals without sufficient wealth and income should not take. Government regulators are trying to protect you from straying outside your investment comfort zone.
Viatical Life Settlement Rate of Return on Investment is Uncertain
Before a policy is sold, buyers must do their due diligence to have the policy valued as accurately as possible. Actuarial tables, and the underlying health of the insured, allow the interested buyer to make projections about the life expectancy of the insured. Investors provide liquidity based upon the valuation assigned to the policy. Calculations are made to come up with an offer that will be attractive to the seller and also leave enough room for the buyer to earn an appropriate risk-adjusted rate of return.
As a settlement investor, you can never be certain as to the rate of return until the insured dies and the insurance company sends you the death benefit of the policy. Rate of return is determined by the difference between the face value of the policy and the purchase amount of the policy. It also factors in any premiums or other expenses that may need to be paid and the time it takes to receive payment on the policy.
Determining life expectancy is not an exact science and that is why it is impossible to project a rate of return with certainty. If it takes longer to collect on a policy and/or costs more to maintain and keep the policy in force, than projected, that will have the effect of lowering the rate of return. At the same time, if an insured dies earlier than expected, your return may be greater than projected. Numerous other factors can also enter into the equation and change the actual rate of return on your investment.
Understanding Viatical Settlement Investments
Before investing in viatical settlements, talk with an expert in the field, weigh the positives and negatives, and then make your viatical investment decision. You should also consult the SEC and any other regulating bodies that oversee this type of investment.