As these new financial vehicles became more established, questions about the need for regulation arose. The most popular of these new vehicles is an asset-backed security known as a viatical settlement. Viatical settlements are a specialized form of receivable financing under which viatical settlement companies buy from the policyholder, at a discounted rate, the right to receive death benefits under life insurance policies. The viatical settlement company may then hold the policy, sell the policy to an individual investor, or pool the policy with others and sell fractions of the pool to investors. The return to investors is the difference between the discounted value paid to the policyholder and the full value paid by the issuing insurance company upon the policyholder's death.
Viatical settlements raise regulatory concerns under the insurance laws.
The initial sale of life insurance policies by terminally-ill policyholders, known as viators, to viatical settlement firms is subject to varying amounts of regulation at the state level, typically by a state's insurance department. An evaluation of the existing regulations in the viatical industry, in light of the various economic rationales for government intervention, shows that, on balance, some regulation is needed to protect this vulnerable population.