C.M.R. 02, 032, ch. 539, Viatical Disclosure Document I
This disclosure document is mandated by the State of Maine Office of Securities.
Viatical Disclosure Document I
Read Before You Purchase
We are offering to sell you an investment called a viatical or life settlement contract. A viatical or life settlement contract is an agreement for the purchase of the death benefit of a life insurance policy. The owner of the life insurance policy being sold is called the owner. The individual whose life is insured by the policy is called the insured.
Some policies are sold because the insureds are terminally ill and need money for medical treatment or other expenses. Other owners or insureds are only chronically ill or are not ill at all, but want to sell their policies because their families are grown or they otherwise no longer need the life insurance. This latter type of viatical or life settlement contract may be called a life settlement, senior settlement, elder settlement, or other similar name.
When the insured dies the investor receives a specific dollar amount that will be greater than the amount paid for the contract.
Some companies sell entire policies to investors, and others sell partial interests in policies. If you purchase a partial interest, the remaining interests in the policy will be sold to other investors.
RISKS
Predicting the life expectancy of someone who is chronically ill or not ill at all may be even more difficult than predicting the life expectancy of a terminally ill person. Therefore, investing in the insurance policy of a chronically ill or healthy person may be even more risky than investing in the policy of someone who is terminally ill.
The insurance company will cancel the policy in which you have invested if periodic premium payments are due and are not made to keep the policy in force. The insurance company will not pay the death benefit if the policy is not in force.
Some of the money you invest probably will be set aside to pay premiums. However, if the insured lives longer than expected, you may be required to pay additional premiums to keep the policy in force.
Also, you may be offered a policy for which no premiums are being paid because the insurance company has waived the premiums for some reason. In certain circumstances, the waiver of premiums may be cancelled, and premium payments will then be required. You may be required to pay those premiums.
It is also possible that the owner or insured will be permitted to keep certain rights under the insurance policy, even though the policy is sold to investors. These rights include the right to disability income and payment for accidental death or disability. If the insured lives longer than expected, you may be required to pay additional premiums to keep these retained rights in force.
A person who buys life insurance is the owner of the policy and decides who the beneficiaries of the policy will be - that is, who will receive the death benefit when the insured dies. When the policy is sold as a viatical or life settlement contract, investors become the new beneficiaries and therefore are entitled to receive the death benefit.
The new owner of the policy may be either the investors themselves or the viatical company. Only an owner of a policy, not a beneficiary, has the right to make premium payments directly to the insurance company so that the policy will remain in force.
If premiums are due, and if the funds that have been set aside to pay premiums run out, you will be dependent on the viatical company to collect additional premium money from investors and to pay premiums promptly. If that company goes out of business or otherwise fails to collect premiums from investors, you may not be allowed to pay the premiums yourself if you are only a beneficiary.
A term insurance policy is issued for a specific time period. The insurance company will not pay the death benefit if the insured outlives that time period. If you purchase a term policy, you will be dependent on the viatical company to renew the policy when the term expires. Even if the policy is renewed, premiums may increase due to a change in the health of the insured.
The insurance company may "contest" a policy for a two-year period after its issuance if the company finds a reason to cancel the policy. The insurance company will not pay the death benefitif:
the insured dies within the contestability period; and the insurance company has a reason to cancel the policy.One example of a reason that an insurance company might cancel a policy: untruthful answers on the policy application.
The policy may also be cancelled if the insured commits suicide within the two-year contestability period.
A group policy insures the members of a specific group of people, usually the employees of an employer. The biggest risk for someone who invests in a group policy is that the policy can be terminated by the employer or the insurance company. Although the policy will contain a provision allowing your interest to be converted to an individual policy, there may be limits or restrictions on the right to convert.
Also, the insurance company may charge additional premiums once the policy is converted.
Internal Revenue Code section 408(a)(3) requires that "no part of trust [IRA] funds will be invested in life insurance contracts." This means that the Internal Revenue Service may not allow you the tax benefits of an IRA if you invest in a viatical or life settlement contract.
Even if such an investment is allowed, you should carefully consider your age, the life expectancy of the insured, and the difficulty in predicting life expectancy before investing IRA funds in a viatical or life settlement contract. Since death benefits are not paid until the insured dies, you may encounter a problem taking annual distributions from your IRA that are mandatory beginning at age 701/12. If the funds are not available to take the mandatory distribution, you will be penalized by the IRS.
The death benefit on a viatical or life settlement contract will not be paid until the insured dies, and there is no established secondary market for viatical or life settlement contracts. This means that you will probably not be able to sell your contract in an emergency to raise money for your immediate needs.
Someone must track the whereabouts and health of the insured and, at the time of the insured's death, obtain a copy of the death certificate and file a claim for death benefits with the insurance company on your behalf. You have no way of determining whether these tracking activities are actually occurring. If the tracking system fails and a death certificate is not provided to the insurance company to verify the death, no benefits will be paid.
The longer the life expectancy of the insured, the longer the insured will need to be tracked and the more likely it will be that the tracking system will fail.
The viatical company from which you purchase your viatical or life settlement contract may provide a performance or fidelity bond, or another similar instrument, with your purchase. The purpose of these instruments is to "guarantee," or "insure," your investment. Ask exactly what is being guaranteed. Also ask the sales person for a copy of the instrument.
If the company issuing the "guarantee" does not have the necessary financial resources to make payments under the "guarantee," you will not receive any benefit from the "guarantee."
You should do a background check on the company issuing the guarantee instrument. Contact the appropriate regulator to verify that the company exists and is in good standing. Obtain a copy of the company's most recent financial statements.
The terms of the contract between the company issuing the "guarantee" and the viatical company may also affect how valuable, or useful, the "guarantee" is to you. Ask for a copy of this agreement.
Do not assume that you will be fully protected by a guarantee stating that if the policy you invest in is cancelled by the insurance company for any reason, the company that sells you the investment will replace it with another one. If the company goes out of business, there will be no one to give you a replacement policy.
Insurance companies are rated based on their financial safety and soundness. A lower rating means that the company is more likely to go out of business.
Each State maintains an insurance guarantee fund for the benefit of policyholders of insurance companies that have gone out of business. The guarantee fund may impose a limit on the amount that can be recovered on each policy.
Also, the payment on your viatical or life settlement contract would be delayed if you needed to seek funds from this guarantee fund or from the receivership of the insurance company. This delay would reduce the rate of return on your investment.
Investing in a viatical or life settlement contract is risky. Be aware that this type of investment may involve risks in addition to those discussed above.
The Maine Office of Securities is the agency of state government responsible for the licensing of brokerage firms, investment advisers and their employees, the registration of investment products, and enforcement of the State's securities laws. Anyone with questions or concerns about viaticals or other investments may call the Maine Office of Securities toll-free at 1-877-624-8551. We may be reached by mail at Maine Office of Securities, 121 State House Station, Augusta, ME 04333-0121.
C.M.R. 02, 032, ch. 539, Viatical Disclosure Document I