Pioneered in 1992, viatical settlements enable the terminally ill to sell their life assurance and l...
Pioneered in 1992, viatical settlements enable the terminally ill to sell their life assurance and liberate funds that would not otherwise be available to them.
Initially the service catered for anyone who the medical profession believed had a life expectancy of two years or less and the offer price remained at an average of 70%. The two-year stipulation no longer applies and offers are regularly made where life expectancy is between three and five years and pro rata equivalent rates are paid.
After a difficult initial period of facing up to the stark reality that their life is going to be much shorter than they had expected, many people make up their minds not to waste their remaining years. Everyone has something they have always wanted to do, an ambition or a dream to fulfil. The fact that a person may have just been diagnosed with a terminal illness does not mean those dreams and ambitions go away in fact just the opposite seems to apply and they are accentuated because the person knows they now have less time in which to achieve and fulfil them.
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Securing an income.
Due to the effects of the illness and the numerous hospital appointments for consultations, checks and treatment, a terminally ill person can generally no longer maintain a full or even part-time job. In any event, most people would not wish to spend the remaining time left to them working. Sick pay and savings will only last for so long, even with a tight rein on spending, and Social Security payments will help but the level of benefit is rarely sufficient to cover all the bills and outgoings. This is one of the times in a person's life when they are most likely to need money and yet, sadly, when lenders are least likely to lend.
Although viatical companies see many different forms of terminal illness, most people who go to them are predominantly suffering from some form of cancer or motor neurone disease. As many as 40,000 people a year are diagnosed in the UK with a terminal illness, many of whom become ill in their most productive years. Viatical companies therefore provide a service to allow some of those people the chance to achieve a reasonable financial balance one that provides sufficient income to pay the regular bills but also gives them the choice to treat themselves and family and do some of those things they have always wanted. The most common things people spend their money on are luxury cruises and holidays or travel to see faraway relatives, or perhaps buy a nice car which may sometimes need to be adapted to allow mobility or refurbish the house and so on. Some of the more unusual purchases have been race horses, paintings, modern sculptures and a holiday swimming with dolphins.
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Evaluating applications.
Each application is unique and must be evaluated before an offer of purchase can be made. The first step is for the viatical company to send out the application forms for completion and return. The most important of those forms are those signed by the applicant providing the company with the authority to write and request information from the attending physician usually a consultant to whom the GP has referred the applicant and the life assurance company.
The medical information is then forwarded to a panel of physicians for evaluation and overview. The offers will be largely dependent on the opinions of probable life expectancy as considered by the physicians involved, although it must be understood that however good the doctors it is only an opinion, and from experience viatical companies have learned their opinion of prognosis is unlikely to be accurate.
Sadly, there are those that do not do as well as expected, but by the same token there are many more who do so much better. When someone is trying to cope with terminal illness, the last thing they need is the stress related to financial worries. It would seem from experience that for many people in such a situation the lifting of those problems by receiving a large cash lump sum has the effect of improving quality of life and people do appear to do much better than originally expected.
Life expectancy, as given by the medical profession, allows the estimation of costs loss of interest and premiums to be paid. Once a policy is purchased then payment of the premiums becomes the responsibility of the purchaser, as is the payment of physician's fees and introducing broker commission, to mention just some of the related costs. These costs are deducted from the value of the sum assured to produce the purchase price the viatical company is able to offer based on the information it is provided with.
Policy details are then obtained from the life assurance office and the company determines if the policy is currently assigned. If it is, then it does not preclude purchase of the policy as long as the assignment can be released. Endowment, whole of life, convertible-term and even decreasing-term policies are all considered and the sums assured tend to fall into the range of £5,000-£1.5m.
Clearly, many policies of assurance are owned by people who have dependants under the age of 18. Although the sale of a policy may be financially beneficial to those dependants as well as the applicant in the shorter or medium term, it may not be the best or most suitable option for some of those involved in the longer term.
A viatical company would usually determine if other policies of assurance exist for the benefit of dependants or ask the applicant to place some of the proceeds in trust. Equally, a viatical company does not wish to offend partners who stand to receive the proceeds under the existing arrangements, so they will want their agreement to the sale before it goes ahead.
The funds realised by selling a life assurance policy are deemed by the Inland Revenue to have already had tax paid at the basic rate, but higher rate taxpayers may incur a liability and it is therefore advisable to seek the advice of a good accountant.
The majority of applicants in the UK now come to viatical companies through an IFA, which is reassuring since there is the satisfaction that the person concerned will be receiving good financial advice to ensure the sale of their policy is the right option for them. Financial advisers can expect to receive a commission in the region of 2%-3.
Depending on the response to requests for information sent to doctors, it will usually take two or three weeks from the return of the completed application forms to offer stage and a further two or three weeks from acceptance of the offer to actual payment, this stage being primarily dependent upon confirmation by the life assurance company of the registered change of ownership.
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Valuable asset.
Since it can make such a huge difference, it is probably worth mentioning a valuable asset of which many people are unaware. The most common and costly mistake made by people who have a company group pension scheme is the failure to take up the option before leaving the company, to convert the death in service benefit (life assurance) from a group policy to an individual whole of life or term contract with a sum assured, usually a multiple of between two and four-and-a-half times pensionable salary.
Ideally, a conversion or take-up of the option should take place before reduction of salary to 'sick pay' levels. Even some financial advisers appear to remain unaware of this option, but where it does exist, it is important to know it is usually only available while at the company or within the immediate 30 days after leaving the service of the company. Evidence of good health is not required since the life assurance cover commences on joining the pension scheme, not at the time of conversion. However, premium rates will be at the standard rates applicable at the time of such conversion, similar in some ways to taking up the option to convert a convertible term contract to another type of policy.
Clearly, the resultant policy can be a source of substantial income if subsequently sold, or considerable financial resource for dependants in the event of the person's demise.
It costs nothing to apply to sell a policy and in the event an offer is accepted and the money paid to the applicant or nominated recipient, the arrangement can be completely reversed at no cost, if the funds are returned within the following 15 days.
Daniel White is senior consultant at Life Benefit Resources.
