Viatical Guide by mikeholy


2    Look Before You Leap

5    An Introduction to Viatical and Life Settlements

6    The Parties Involved

8    How the Process Works

10   Accelerated Death Benefits

12   Information for Potential Investors in Viatical


16   Tips for Persons Thinking of Selling Their Life

     Insurance Policy

18 Additional Help
Look Before You Leap
                                                Extensive information regarding the investment
                                                opportunity must be disclosed to investors. It should
                                                include but not be limited to: all the material risks
                                                associated with the investment; a brief description of
Into Viatical and Life Settlement Investments   the business background of the executive personnel and
                                                promoters of the issuer of the viatical investments; a
                                                description of the business of the issuer; capitalization
                                                of the issuer; amount and nature of funded debt of the
                                                issuer; use of proceeds from the offering; compensation
                                                to promoters; executive remuneration; pending material
                                                litigation involving the issuer; underwriters’ commissions
                                                and discounts; any adverse actions taken by any state,
In 2005, Florida’s
                                                federal or self-regulatory agency, if material, against
Legislature put into place
                                                the issuer, underwriter, promoter, officer or director, or
important consumer
protections requiring full                      in which action they were named; and information,
disclosure of the risks                         where appropriate, concerning the financial condition of
involved in viatical or life                    the issuer.
settlement transactions. A
viatical or life settlement                     Fraud in this industry has potentially cost investors up
transaction is an agreement                     to $2 billion in losses since 1996. The average age of
in which viatical settlement                    the investor defrauded is 70 years and the average loss
providers, securities                           is $40,000.
issuersand securities dealers
match those who want to                         Effective July 1, 2005, there is no longer a “viatical
sell their life insurance
                                                settlement sales agent” as formerly defined in statute. The
policies at a discount to
                                                new law defines certain investments in viatical settlements
investors willing to buy the
rights to those policies.                       as securities and subjects them to Florida’s securities laws.
Although these agreements                       This means investors must be given full and fair disclosure
were originally limited                         of all material facts surrounding the transaction.
to insured people who
were terminally ill, any                        In addition, determination of the investment’s suitability
insured person — regardless                     for the investor must be considered by registered dealers
of health or age — can                          and their agents, including the investor’s financial and tax
viaticate their life insurance                  status, investment objectives, and other relevant factors.
policy in Florida.
                                                Life agents are no longer authorized, by virtue of their life
                                                licenses, to sell such securities. Selling viatical settlement
                                                investments, unless performed pursuant to an exclusion or
                                                exemption, now requires a license from, and is regulated
                                                by, the Office of Financial Regulation.

2   Viatical and Life Settlements                                                     Viatical and Life Settlements   3
                                          An Introduction to Viatical
                                                     and Life Settlements
                                                               A viatical settlement or life settlement investment is
                                                               a transaction in which a life insurance policyholder
                                                               sells his policy before the death of the insured. Often,
                                                               the insured has been diagnosed as terminally ill, and
                                                               wishes to use the money to pay for living and medical
                                                               expenses. Viatical settlements may also involve healthy
                                                               policyholders who do not have a terminal illness.

                                                               When the viatical settlement transaction is complete,
Sales agents, who on July 1, 2005, had contracts in process,   the policy owner (also known as the viator) gives up
had a grace period of up to thirty days to complete them,      ownership and control of the policy to another party
if certain conditions existed. New business, however, (on      (typically the viatical settlement provider). The viator
and after July 1, 2005) is subject to securities laws set      sells the insurance policy to the viatical settlement
forth in Chapter 517, Florida Statutes.                        provider, at a discount; which means the viator receives
                                                               less than the face value of the policy.
Agents who sell viatical settlements should be aware that
the Florida Securities and Investor Protection Act makes       Typically, interests in these viaticated life insurance
clear that it is unlawful for any person in the solicitation   policies take the form of securities and are sold to
or sale of a viatical settlement purchase agreement to         investors by securities dealers. Multiple investors
obtain money or property by means of an untrue statement       may invest in a single policy or the investors may
of a material fact, to make misleading statements given        own an interest in an underlying pool of viaticated
the circumstances under which they were made, or to            policies. Depending on the way the security is
engage in any transaction, practice or course of business      structured, the new owner, or the securities issuer,
which operates or would operate as a fraud or deceit upon      may take on the responsibility to pay the premiums
a person. To do so could subject the individual agent to       on the insurance policy.
felony charges of the third or first degree, depending upon
the face amount of the policy sold.                            When the insured dies, the person who has purchased
                                                               an interest in the insurance policy collects a portion of
                                                               the death benefits either directly from the insurance
                                                               company, or from the issuer of the securities. From
                                                               an investor’s perspective, a viatical settlement is an
                                                               investment in the timely death of the insured person.

4   Viatical and Life Settlements                                                         Viatical and Life Settlements    5
The Parties Involved
To better understand how a          Insured — The individual whose      Viatical Settlement Broker — A person or firm licensed by the
viatical settlement works,          life is insured by an insurance     Florida Department of Financial Services that offers or attempts
it helps to know who is             policy. This individual may or      to negotiate a viatical settlement between a policyholder residing
involved in this type of            may not be the policyholder.        in Florida and a viatical settlement provider. This person or firm
financial transaction.                                                  is responsible to, and should only represent the interests of, the
                                    Issuer — Any person or legal        policyholder. A licensed life insurance agent may also negotiate
Beneficiary — The person(s)         entity who proposes to issue, has   such settlements without obtaining a separate viatical settlement
designated to receive the           issued, or shall issue securities   broker’s license in Florida. Such an agent must hold a proper
death benefit from a life           such as interests in a viaticated   appointment from a viatical settlement provider.
insurance policy upon the           life insurance policy. Any person
death of the insured. In a          who promotes the viatical           Viatical Settlement Contract — A written agreement between a
viatical settlement, one            investment may also be deemed       viatical settlement provider and a policyholder that establishes
or more investors may               an issuer.                          terms under which the provider will pay the policyholder for
receive this designation on                                             the policy.
an “irrevocable” basis. This        Investor or Purchaser — A person
means no one can change it          who buys into one or more           Viatical Settlement Provider — A company or individual licensed
without written permission          viatical investments.               by the Florida Department of Financial Services that purchases
from the beneficiaries.                                                 ownership and beneficiary rights from the policyholder. The
                                    Policyholder — The individual       provider may assign beneficiary rights to one or more investors.
Dealer — The company                who owns the policy and has         As of the printing date of this publication, only a handful of
offering, buying, selling or        the legal right to name the         companies held viatical settlement provider licenses in Florida.
otherwise dealing or trading        beneficiary or sell control and
in securities issued by another     ownership of                        Viaticate — The process by which a person sells a life insurance
person. A dealer includes any       the policy.                         policy to a third party for less than its face value.
issuer who, through persons
directly compensated or             Viatical Settlement — The sale      Viator — The owner or policyholder of a life insurance policy, or
controlled by the issuer,           of a life insurance policy to a     a certificate holder under a group policy, who has entered into a
engages in the business of          licensed viatical settlement        contract to sell his or her policy.
offering or selling securities,     provider in return for a
which are issued or are             negotiated payment. This
proposed to be issued by            payment is usually represented
the issuer.                         as a percentage of the policy’s
                                    face value.

6   Viatical and Life Settlements                                                                                 Viatical and Life Settlements   7
How the Process Works
                                                                      When the viator dies, the
Money is raised from investors to purchase interests in life          insurance company pays money to
insurance policies. The viatical broker and the policyholder          the issuer or broker-dealer, which
negotiate a price for the life insurance policy with the viatical     then distributes the $100,000
provider. The negotiated price is usually represented as a            death benefit to the investor(s).
percentage of the policy’s death benefit.                             If the viator had a 24-month life
                                                                      expectancy and died at the end
When the transaction is complete, the policyholder receives the       of that 24 months, the investor
negotiated payment and the investors receive an interest in the       would receive his 28 percent
policy. At this point, the viator gives up ownership and control      total return or roughly a 14
of the policy to the securities issuer. Generally, policies written   percent annual return. If the
on individuals with serious illnesses and shorter life expectancies   viator lives six years beyond his
will generate a settlement for a higher percentage of the death       life expectancy, the investor still
benefit than those written on healthy individuals or those with a     receives a 28 percent total return
longer life expectancy.                                               on his original investment. His
                                                                      annual return, however, has been
For example, a policyholder may sell a single $100,000 life           reduced to 3.5 percent.
insurance policy at 50 percent of the policy’s value. The issuer or
broker-dealer would take $50,000 collected from the investor(s),      Investors should be aware of this
and give it to the policyholder in exchange for the policy, which     potential variability in annual
will pay $100,000 when the policyholder dies.                         returns. Selling a policy to an
                                                                      investor is often less financially
The same transaction looks different to the investor. The             advantageous for the policyholder
issuer, typically through a dealer, raises capital to purchase the    than using accelerated benefits
$100,000 policy for $50,000 by selling interests in the policy to     or taking out a loan against a
investors. If the policy is offered at a 28 percent discount of its   policy’s value.
face value of $100,000, the issuer or broker-dealer will collect
$72,000 from investors, and forward $50,000 of it to the viator
to purchase the policy.

8   Viatical and Life Settlements                                          Viatical and Life Settlements    9
Accelerated Death Benefits
An Alternative to Viatical Settlements
Before considering a viatical         accelerated death benefit in the
settlement, a policyholder should     terms of the life insurance contract,
check with his or her insurance       many companies are making
company or agent to find out if the   this option available to all their
policy qualifies for an accelerated   policyholders. A policyholder can
death benefit. Some life insurance    check with his or her insurance
companies offer this benefit,         agent or company to find out if this
which pays part of a policy’s death   option is available.
benefit, minus any outstanding
policy loan, before the death of      In some cases, Florida law prohibits
the insured.                          a viatical provider from negotiating
                                      or entering into a contract involving
This is useful for policyholders      a policy that contains an accelerated
who want to use only a portion of     death benefit. For the restriction
the death benefit, and leave the      to apply, this benefit must equal
remainder of the money to their       or exceed the amount available
heirs. Therefore, when the insured    in a viatical settlement, and the
dies, their designated beneficiary    insurance company must agree to
receives the remainder of the         pay it.
death benefit.
                                      Policyholders should carefully
When accelerated death benefits       examine accelerated death benefit
are paid, the insurance company       provisions and compare them with
may charge a service fee. But         the viatical settlement offers, to
this fee is much smaller than         determine which would provide the
the amount of benefits lost in        greatest benefit.
a typical viatical contract. This
usually makes accelerated death
benefits a much better deal
for policyholders. While some
older policies may not grant an

10   Viatical and Life Settlements                                            Viatical and Life Settlements   11
Information for Potential
Investors in Viatical Securities
Persons selling viatical investments that are considered securities are       If the policy matures within the         proceeds to investors. Who is
required to provide each investor with full and fair disclosure of all        estimated life expectancy of the         responsible for paying these costs
information relevant to an investment decision. Many times these              insured, your annual rate of return      and who will pay these costs if
disclosures are made in a prospectus or offering memorandum. Be sure          will be high; if the insured lives for   the issuer or dealer selling the
you are provided with this risk disclosure document and be sure to read       a long time, your annual rate of         securities goes out of business
the document carefully.                                                       return will be low. Make sure you        or is otherwise unable to pay
                                                                              understand the difference before         these expenses?
Verify that the person offering or selling securities consisting of           you invest.
viaticated policies is properly licensed in Florida. To verify licensure of                                            The viator’s surviving family
all parties involved, whether you are buying or selling, visit                Consider diversifying your portfolio     members or heirs may challenge, or call our toll-free Consumer Helpline at 1-800-              by investing in a pool that contains     the changes made to the life
342-2762. To find out if the person selling you a viatical settlement         many different viaticated policies.      insurance policy contract, delaying
investment is registered to sell securities, please call the Office of        Spreading your investment dollars        your payment even further. If
Financial Regulation at (850) 410-9893.                                       over many insurance policies             this happens, determine who is
                                                                              should reduce your overall risk          responsible for paying for any legal
Unlike some other investment options, a viatical investment usually is        and may increase the liquidity           fees incurred defending the rights
not readily convertible into cash. This means you may not be able to          of your investment. You should           to the policy.
get any portion of your investment back, even for an emergency, until         also consider diversifying your
the viator dies and a death claim payment is paid. Remember that the          investments into other products          The life expectancy estimate
insured may live much longer than the estimated years, or live longer         such as stocks, bonds or mutual          is crucial to the success of the
than you. Therefore, you will not have access to your investment dollars.     funds, to further reduce your risk.      investment. Know how the life
Consider whether you can afford to keep the money tied up until the                                                    expectancy estimate is formulated.
insured dies.                                                                 Ownership of viatical investments        Determine the background,
                                                                              can bring significant ongoing            credentials and experience of the
Remember, the life expectancy of the insured person is just an estimate       expenses. These costs include            person or company that will issue
and many viators have lived significantly longer than estimated. There        those associated with paying the         the life expectancy estimate.
is no guarantee the insured person will die when the estimated time           ongoing life insurance premiums,
runs out. Given the potential uncertainty surrounding life expectancy         tracking the viator, monitoring the      Know whether the person or
estimates, investing in viaticals may be considered a speculative             health of the viator, filing a claim     company establishing the life
investment. Be cautious of any person that represents these investments       for payment with the insurance           expectancy examined the viator or
as guaranteed or low risk.                                                    company and distributing the             just reviewed medical records.

12   Viatical and Life Settlements                                                                                         Viatical and Life Settlements    13
 Determine how accurate this            • Serious problems may also arise
 individual or company’s life           if the original application
 expectancy estimates have been         submitted by the insured was
 in the past. Find out if there was a   intentionally inaccurate or
 second opinion. Consider asking for    “cleansheeted.” Cleansheeting
 a written report of the accuracy of    is when an agent or
 the life expectancies issued by the    policyholder deliberately omits
 company that will be issuing yours.    or misrepresents a medical
                                        history, or other information
 Viatical settlement investments        on an application, to obtain an
 used to fund an IRA or 401(k)          insurance policy.
 can create financial hardships if
 the insured does not die before        • Be cautious of fraudulent
 you need to start collecting your      schemes in which the
 retirement benefits, or before         policyholder obtains life
 federal law requires you to begin to   insurance policies, then
 make withdrawals.                      immediately sells the policies,
                                        and collects the cash settlement.
                                        These are called “wet ink”
 Beware the Dangers of Fraud            policies and may involve fraud.

 • You may lose your investment         • The insurance company may
 if the viatical provider, issuer,      not pay death benefits on a
 dealer or others involved have         policy obtained using fraudulent
 financial trouble or are involved in   information, and may sue
 fraudulent practices.                  for damages if the fraud is
                                        discovered later.
 • Life insurance companies
 require a two-year “contestability
 clause” to investigate and rescind
 policies obtained using fraudulent
 information. If you invest in a
 policy less than two years old, you
 take on a greater risk, since the
 insurance company can
 cancel the policy if it was
 obtained fraudulently.

14   Viatical and Life Settlements          Viatical and Life Settlements   15
Tips for Persons Thinking of
Selling Their Life Insurance Policy
• Check with your insurance              • Protect your privacy. A large        • As the policyholder, you may            Beware the Dangers of Fraud
company or agent to find out if          number of people may be involved       change your mind and rescind
the policy qualifies for an              in a viatical transaction requiring    a viatical settlement contract            • It is illegal for anyone to purchase
accelerated death benefit. An            access to personal information.        within 15 days from the date the          your life insurance policy under
accelerated death benefit pays part      Know who is involved, and check        settlement funds are received.            false pretenses, for any purpose.
of a policy’s death benefit, minus       them out thoroughly.                                                             Any person who engages in such
any outstanding policy loan, before                                             • If the viatical provider pays off a     activity can be sued, and may face
the death of the insured. This is        • To verify licensure of all parties   policy loan out of the settlement         criminal charges under Florida’s
useful for policyholders who want        involved, whether you are buying       proceeds, you will have to pay the        insurance fraud laws.
to use only a portion of the death       or selling, visit, or    viatical provider that amount, plus
benefit and leave the balance to         call our toll-free Consumer Helpline   the actual cash received, if you          • Be wary of an agent who says he
their heirs.                             at 1-800-342-2762. To find out if      cancel the viatical contract during       can sell your existing policy and get
                                         the person selling you a viatical      the 15-day “free look” period.            you a replacement policy.
• Shop around and contact several        settlement investment is registered
licensed viatical settlement             to sell securities, please call the    • If the policy is a whole life policy,   • Don’t omit, or allow to be
providers or licensed viatical           Office of Financial Regulation at      make sure the contract specifies          omitted, any factual information
settlement brokers. One provider         (850) 410-9893.                        what will happen to any dividends,        that should be included on an
might pay 35 percent of the face                                                additional policy face value              application for life insurance.
value of a policy, while another         • Your decision may have a             increases, and accidental death or        These actions may be fraudulent
might pay 45 percent for the same        negative financial impact on you       other benefits, before the viatical       and you could face criminal
policy. A viatical settlement broker     and others as you may be denying       settlement is signed and executed.        charges, and be uninsured.
has fiduciary responsibilities to you,   your surviving family members a
the viator.                              much needed benefit from the life      • Contact any governmental                • Florida law requires viatical
                                         insurance policy.                      agencies and charitable                   brokers and providers to supply
• Find out the name of the escrow                                               organizations that provide you            certain written disclosures to
agent involved in the transaction        • You may have to pay taxes on the     entitlements or benefits. The             prospective viators. The name,
and check with the department to         sale that could adversely affect       income from a viatical settlement         business address and telephone
see whether any complaints have          your financial condition.              may disqualify you from receiving         number of the escrow agent
been lodged against this individual.                                            certain Medicaid, Medicare, Social        involved in the settlement process
                                         • If there is an existing loan         Security or other benefits.               must be disclosed.
                                         against your policy, you may have
                                         to pay it back before initiating a
                                         viatical settlement.

16   Viatical and Life Settlements                                                                                            Viatical and Life Settlements   17
Additional Help                                                                DFS Service Offices

                                                                               Daytona Beach                       Pensacola
                                                                               135 Executive Circle, Suite 103     610 E. Burgess Road
                                                                               Daytona Beach, FL 32114-1180        Pensacola, FL 32504-6320
                                                                               (386) 323-0900                      (850) 453-7800

                                                                               Fort Lauderdale                     St. Petersburg/Largo
                                                                               499 N.W. 70th Ave., Suite 301-B     11351 Ulmerton Road, Suite 240
                                                                               Plantation, FL 33317-7574           Largo, FL 33778-1636
                                                                               (954) 321-2900                      (727) 587-7260

Those who have questions or problems regarding viatical settlements,                                               Tallahassee
accelerated death benefits or life insurance may call the Consumer             Fort Myers
                                                                               2295 Victoria Ave., Suite 163       Larson Building
Helpline toll-free at 1-800-342-2762. The hearing impaired may order                                               200 E. Gaines St.
                                                                               Ft. Myers, FL 33901-3867
such publications by using a TDD to call 1-800-640-0886.                       (239) 461-4000                      Tallahassee, FL 32399-0323
                                                                                                                   (850) 413-3132
You may also call the DFS service office closest to you. The service           Jacksonville
offices are on the next page. Consumers may also obtain information            921 N. Davis                        Tampa
and assistance from the Department of Financial Services Web site at           Building B, Suite 260               5309 E. Fowler Ave.                                                                 Jacksonville, FL 32209              Tampa, FL 33617-2221
                                                                               (904) 798-5800                      (813) 899-6160
To determine whether the person selling you the viatical or life
settlement investment is registered to sell securities or has a disciplinary   Miami                               West Palm Beach
history, call the Office of Financial Regulation at (850) 410-9893             401 N.W. Second Ave., Suite N-307   400 N. Congress Ave., Suite 210
                                                                               Miami, FL 33128-1700                West Palm Beach, FL 33401-2933
Other Numbers and Web sites:                                                   (305) 536-0300                      (561) 640-6700
Better Business Bureau (Check local directory)                                                                    Orlando
                                                                               400 W. Robinson St., Suite N-401
Florida Attorney General: (850) 414-3300                                       Orlando, FL 32801-1751
                                                                               (407) 835-4400

National Association of Insurance Commissioners: (816) 842-3600

Office of the U.S. Attorney Victim/Witness Line: 1-800-379-4643

18   Viatical and Life Settlements                                                                                     Viatical and Life Settlements   19
Notes   Notes
Division of Consumer Services
200 E. Gaines St.
Tallahassee, FL 32399-0323

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