I once had a bet with a press officer that I could get the term "viatical settlement" into a press release. I did have some insider information and won my bet. I wish I could have lost a similar bet on this article.
Life insurance settlements fall into two types. One is a viatical settlement which can be set up by someone of any age who has been diagnosed with a life-threatening illness and is expected to die within say twenty-four months.
The second is the traditional life settlement which can set up by someone who is over 65 who has not been diagnosed with a life-threatening illness but who is not expected to live more than fifteen years.
Today I just want to focus on viatical settlements.
The market in the USA grew up in the 1980s when a diagnosis of HIV was a death sentence and many of those diagnosed had life policies and were young.
That market has largely gone, with improved treatments, but there remain others who still seek to obtain cash from a life insurance policy before they die.
USA regulation varies from by State and the issue is extremely controversial due to allegations of ambulance chasing, sales pressure, and poor valuations.
The issues a person with a life insurance policy and a diagnosis of a terminal illness needs to consider are complex and there are conflicting interests.
First, obviously, is does the policy already have a clause to allow payout before death.
In the USA many policies do through what are called accelerated death benefits (ADB) and they often offer an amount between 25 to 95 percent of the death benefit.
Over here we have terminal illness clauses. Let's assume you were unlucky and bought a simple life policy with no ADB. Now you might like to think about a viatical settlement.
The key issue on what you will get depends on how long you are likely to live for. The viatical settlement people would prefer it if you dropped off straight away so the first conflict is around medical opinions.
The provider will want an opinion that says you are going to live for much longer than most people with your condition - that way you can be offered less money.
You on the other hand want an opinion that is "real" - how prepared are you for this level of clarity and how confident are you about arguing your case with a provider?
The other issues are the usual ones, is the company you are getting the settlement from offering you a fair deal, are you covered if they go bust, is your IFA knowledgeable about this market?
In the USA the National Association of Insurance Commissioners has established model regulations for the viatical industry, including guidelines on how much money you should expect to get if you sell your insurance policy.
Because of NAIC recommendations, some states require viatical settlement firms and brokers to hold licenses or be registered with the state insurance commissioner in order to conduct business in that state.
Finally it is important to check out the tax implications of a decision to use a viatical settlement.
So why this article? There is no viatical settlement market in the UK.
The answer lies in the publication of the final report on simple products published in March. The term life product will exclude terminal illness cover.
If (and it is a big if) this product achieves large volumes of unadvised sales it is only a matter of time before we are in the USA position of controversy and lots of new jobs for regulators.
Why didn't they listen?
Richard Walsh is a director and fellow of SAMI Consulting www.samiconsulting.co.uk
From 20 April
At the end of National Heart Month
Ruth Gilbert investigates another potential threat to life policies
Created for clients who might have rejected life insurance
In partnership with Golden Charter