5. Viatical and Life Settlements, & Classes of Life Policies

Viatical Settlement Broker

A person that, on behalf of another and for a fee, commission, or other valuable consideration, introduces viators to viatical settlement providers or offers or attempts to negotiate viatical settlement contracts between a viator and one (1) or more viatical settlement providers is a viatical settlement broker.

Viatical Settlement Provider

A person, other than a viator, that enters into or effectuates a viatical settlement contract is known as a viatical settlement provider.

Terminally Ill

Being terminally ill means having an illness or sickness that can reasonably be expected to result in death in 24 months or less.

Viatical Loan Borrower

The owner of a Life insurance policy or the certificate holder under a group Life insurance contract insuring the life of a person with a catastrophic, life-threatening, or chronic illness or condition who enters into a viatical loan contract with a viatical loan provider is a viatical loan borrower.

What Must Be Disclosed

- Any affiliation between the viatical settlement provider and the issuer of the insurance policy to be viaticated - The name, address, and telephone number of the viatical settlement provider - The dollar amount of the current death benefit payable to the viatical settlement provider under the policy or certificateThe availability of any additional guaranteed insurance benefits, the dollar amount of any accidental death and dismemberment benefits under the policy or certificate, and the viatical settlement provider's interest in those benefits - The name, business address, and telephone number of the independent third party escrow agent and the fact that the viator or owner may inspect or receive copies of the relevant escrow or trust agreements or documents - That coverage on the lives of any other joint or additional insureds or family riders could be forfeited - Any change in ownership or beneficiary must be communicated by the provider to the insured within 20 days after the change

Disclosure to Consumers

A disclosure statement must be given to each viator or insured before the individual is asked to sign any documents, as well as at the time the viatical settlement is signed by all parties.

Fraudulent Acts and Prohibited Practices

It is prohibited to enter into a viatical settlement within two (2) years of the insurance policy's issue unless: - The policy was issued as the result of the viator's conversion from a group policy so that coverage has been in effect for 24 months or more. - The insured has become terminally ill or disposes of ownership interests in a closely held corporation subject to terms of a buyout agreement in effect at the time the original Life policy was issued. Previous

Chronically Ill

- Being unable to perform at least two (2) activities of daily living, or ADLs, (eating, toileting, transferring, bathing, dressing, or continence) - Requiring substantial supervision by another person to protect the individual from threats to health and safety due to severe cognitive impairment.

Fixed vs. Variable Life Insurance

A Fixed Life insurance policy is one that has a set, guaranteed interest rate. A Variable policy has an interest rate that changes along with a set of mutual funds or other stock market indicators. When the stock market performs well the cash value in the variable products increases. If the value of the stocks, mutual funds, or other indicators decrease, the cash value in the Variable product will also decrease. The cash value within the Fixed product will always increase at a pre-determined rate, but because there is more risk with the Variable policy there is a chance for greater return on the cash value (as well as the chance for loss).

Viaticated Policy

A Life insurance policy or certificate that has been the subject of a completed viatical settlement contract or viatical loan contract is known as a viaticated policy.

Participating vs. Nonparticipating

A mutual Life insurer may issue policies on both a participating (sharing in the profits of the company) and nonparticipating basis, provided that the right or absence of participation is related to the premium charged. The policy must clearly state whether it is participating or nonparticipating (also called par/nonpar).

Viatical Settlement Purchaser

- A person who gives money as consideration for a Life insurance policy or an interest in the death benefits of a Life insurance policy - A person who owns, acquires. or is entitled to a beneficial interest in a trust that owns a viatical settlement contract, or is the beneficiary of a Life insurance policy that has been or will be the subject of a viatical settlement contract, for the purpose of deriving an economic benefit

Viatical Loan Contract

A viatical loan contract is a written agreement through which a Life insurance policyholder or a person covered under a group policy who has a catastrophic, life-threatening, or chronic illness or condition secures a loan from a viatical loan provider by using the policy as collateral. The secured loan amount is less than the face value of the policy; the difference between the loan principal and the face value of the policy is used to pay, among other things, the accrued loan interest. Upon repayment of the viatical loan, the viatical loan provider's collateral interest in the policy terminates, and the security interest is released to the original policyholder, or his or her designee. Viatical loans do not include loans taken against the cash value of a Life insurance policy for the purpose of paying premiums due.

Group and Individual Life Insurance Underwriting Differences

- Exposure to claim payment is lowered per individual because the risk is spread over the group, usually resulting in a cost savings to the group because of this reduced adverse selection - everyone is insured. - Underwriters look more closely at the specific health history of an insured. - Insurers cannot discriminate against an individual in the group who has poor health. People who might be declined individually may be included in a group policy as a condition of employment/membership in the group. - Adverse Selection: Over time, health risks in the group change as people are added to or subtracted from the group and can lead to an uneven balance between older, unhealthier people and younger, healthier individuals. - Group Credit Life usually lists the creditor as the beneficiary in order to pay off the debt. Individual Credit Life lists the individual as a beneficiary who will be responsible for paying off the debt when the insured dies.

Ordinary vs. Industrial (Home Service)

- Ordinary Life insurance policies normally have face value amounts of more than $1,000 and have a variety of structures and benefits. - Industrial Life policies are simple policies with:A) Benefits of $1,000 or less (but may be more).B) Premiums that are collected at the insured's home on a weekly or monthly basis. The name comes from the fact that they were originally sold to industrial workers who were paid weekly; they are also known as home service policies because the agent normally comes to the home to collect the premium. The agent's territory is called his "debit." Today, this method of marketing represents less than two (2) percent of Life insurance in force in the U.S. Previous

Examinations, Record Retention, and Investigations

- The Department may examine or investigate any person or business that is necessary or material to the examination of a licensee. - Records must be kept for five (5) years. - Any costs incurred during an exam of a provider or broker will be charged to the provider/broker.

Viatical and Life Settlements

A viatical or life settlement purchase agreement is the contract or agreement in which the viatical or life settlement buyer agrees to buy all or part of a Life insurance policy on the life of someone with a critical or terminal illness. This gives the buyer access to the policy's death benefit. Example: Karl was told by his doctor that he is terminally ill and likely has only one year to live. Karl owns a Life insurance policy with a $200,000 death benefit, but he does not have money to pay health insurance bills. Jean steps in and agrees to buy the policy from Karl for $150,000 and makes herself the policy's beneficiary. Karl gets money to pay his bills, and when he dies Jean will receive the policy's $200,000 death benefit.

Viatical Settlement Contract

A written agreement entered into between a viatical settlement provider and a viator is known as a viatical settlement contract. The agreement must establish the terms under which the viatical settlement provider will pay compensation or anything of value, which is less than the expected death benefit of the insurance policy or certificate, in return for the viator's assignment, transfer, sale, or bequest of the death benefit, or ownership of all or a portion of the insurance policy or certificate of insurance to the viatical settlement provider.

Group Policies

Group policies are written on a group of people under a single master policy, usually issued to their employer or another trustee. Individual group members are usually issued certificates of coverage rather than copies of the policy. - The master policyholder or sponsor assists in the plan's administration. - Coverage is generally Term Life but can be permanent insurance. - If an employer is the master policyholder and pays premiums, then costs on policies with a face amount of up to $50,000 are income tax-deductible for the employer.

Permanent vs. Term

The two (2) basic types of Life insurance policies are Term Life insurance and Permanent Life insurance. Term Life offers coverage for a specific and predetermined period of time, and its only benefit is a death benefit. Permanent Life offers a death benefit along with the accumulation of cash value. Examples: Whole, Universal, and Variable Life policies. Term Life insurance: - Temporary insurance protection - Low cost - No cash value - Usually renewable - Conversion (depending on the policy) to permanent Life insurance Permanent Life insurance: - Permanent insurance protection - More expensive to own - Builds cash value - Loans are permitted against the policy - Favorable tax treatment of policy earnings - Level premiums

Fraudulent Viatical Settlement Act

Because of widespread fraud in some segments of the viatical settlement industry, many states have developed Fraudulent Viatical Settlement Acts to detail the legal conduct of these types of policy contracts. Some provisions of the various Acts include: 1. Requiring and defining the licensing and conduct of viatical settlement brokers. 2. Requiring disclosure of: A) Facts regarding viatical settlements, including the financial consequences of selling a Life insurance policy in a viatical settlement. B) Possible alternatives to a viatical settlement. 3. Making it unlawful to solicit or sell viatical settlement contracts using untrue facts or by engaging in any type of fraud regarding viatical settlement contracts.

Viator

- The owner of a Life insurance policy or a certificate holder under a group policy who enters or seeks to enter into a viatical settlement contract - A person with a catastrophic or life-threatening illness who has a Life insurance policy and sells or intends to sell it in a viatical settlement; one who owns and assigns a Life insurance policy in a viatical settlement

General Account vs. Separate Account

1. Money invested in a Fixed policy goes into the general accounts of the company, and consequently, the safety of such an investment may be affected by the stability and strength of the company. 2. A separate account is held by an insurance company for the investments made through Variable contracts. The general and separate accounts may not be co-mingled.

Viatical Settlement Broker Authority and Licensing

Life and annuity agents must obtain a license before selling viatical agreements by submitting the proper application and paying the appropriate fee.

Individual Policies

Single policies written on or for a particular individual who receives a copy of the policy are known as individual policies. A policy can be one of a great number of types.

Regulation of Variable Products

The state securities and regulated industries bureaus enforce uniform securities acts. The primary focus is on cases involving securities fraud and sale of illegitimate products including boiler room sales activity. These bureaus enforce anti-fraud, securities registration, and broker/dealer licensing laws. They review securities registration to ensure compliance with the full disclosure and investor protection sections of the code and also review the disciplinary history of broker/dealers and agents to determine whether licenses should be revoked. In addition to the state bureaus, the Federal Government set up the Securities and Exchange Commission (SEC) and National Association of Securities Dealers (NASD) to administer the federal securities laws. It is the primary mission of the SEC to protect investors and maintain the integrity of the securities markets. The two consolidated in 2007 to form FINRA. Producers must have both a Life insurance producers license as well as a FINRA securities license to sell any variable products.