Thursday, May 25, 2006

Viatical Settlements

The Canadian Centre for Elder Law Studies has published its “Study Paper on Viatical Settlements” this month. (I will refer to the paper as the “Study Paper.”) You may reasonably ask--as I did when I saw the title-- “What is a viatical settlement?”

The basic concept is that a person who owns and is insured under a life insurance policy, and who has a short life expectancy, sells the death benefit. The insured person, or the “viator,” receives funds while he or she is still alive, while the person who buys the death benefit, or the “viatical settlement provider,” takes over paying the premiums, and receives the death benefit when the insured person dies. The viatical settlement provider pays the viator less than the amount of the death benefit.

According to the Study Paper, the first major commercial market for viatical settlements was among AIDS patients in the United States in the 1980s, who then had short life expectancies. Proponents of viatical settlements saw them as a means of allowing the patients to live out their remaining life with some financial security.

The term viatical settlement is generally used to refer to people who have a catastrophic or life-threatening illness, and a life expectancy of two years or less. This type of arrangement is also marketed to seniors who may have a longer life expectancy than two years as “life settlements.”

In British Columbia, section 26 of the Insurance Act, RSBC 1996, c. 226, prohibits trafficking or trading in life insurance policies, with limited exceptions. Effectively, this prevents a legal viatical settlement industry in British Columbia. Several other Canadian provinces have similar legislation.

The Study Paper looks at the arguments for and against legalizing viatical settlements in those provinces where they are prohibited.

The main argument for legalizing viatical settlements is that an absolute prohibition is an unnecessary restriction on people’s freedom to deal with their insurance. If someone with a short life expectancy decides that it is in his or her best interest to transfer the death benefit from a life insurance policy, he or she should be allowed to do it.

There are arguments on the other side, including:
1. There is a risk that Viatical Settlement Providers will take unfair advantage of people who are especially vulnerable, and who may not make fully informed decisions. This can harm their dependants, who may need the death benefits;
2. There are costs to governments, and ultimately taxpayers, of regulating the industry if it is legalized;
3. There may be costs to insurance companies. When insurance companies set the price for premiums, they expect that a percentage of people will allow their policies to lapse, thereby reducing the costs to the insurance companies. If viatical settlements become popular, less people will let their policies lapse, and the insurance companies will have to pay more death benefits.

The Study Paper also looks at regulation to protect both viators, and investors in viatical settlements. A regulatory regime would need to encompass both insurance regulation, and securities regulation. The Study Paper does not include proposed legislation for British Columbia, but does provide a very good analysis of what issues would need to be addressed if viatical settlements were legalized and regulated.

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