Selling Death Short: The Regulatory and Policy Implications of Viatical Settlements

INTRODUCTION In recent years, the escalation of AIDS into a national crisis has devastated its victims' health as well as their finances.(1) This crisis has generated the need for innovations both in medical approaches to the treatment of AIDS and HIV, and in financial options available to help patients finance their medical and other living expenses. One response of the financial community has been the creation of vehicles to provide terminally-ill policyholders with early access to the death benefits under their life insurance policies, which would otherwise be unavailable to them during their lives.(2) 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.(3) 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.(4) 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.(5) 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.(6) Though the concept of viatication may sound ghoulish, the business of viatical settlements is generally legal and provides a service to terminally-ill patients.(7) The purchase price for the policies enables the policyholders to realize some estimation of the policies' present value, to use for their living and medical expenses. Viatical settlements raise regulatory concerns under the insurance laws.(8) The initial sale of life insurance policies by terminally ill policyholders, known as viators,(9) to viatical settlement companies is subject to varying amounts of regulation at the state level, typically by a state's insurance department.(10) As a result of the differences in the states' regulations, the sale of otherwise identical policies in different states may lead to different financial outcomes for viators living in different states. While this is not necessarily problematic, these differing results may lead to financial inequities for otherwise similarly-situated viators. Part I of this Article provides an overview of the creation and growth of the viatical industry as a response to the increasing medical costs and decreasing income streams facing AIDS- and HIV-infected patients.(11) Part II sets out the problem of whether and how to regulate the viatical industry, examining the risks and theoretical justifications for regulating the purchase side of the viatical industry.(12) Part III details the existing regulation of the viatical industry.(13) And Part IV is an evaluation of existing regulations in the viatical industry, in light of the various theoretical rationales for government intervention, concluding that, on balance, some regulation is needed to protect this vulnerable population.(14) I. OVERVIEW OF THE VIATICAL INDUSTRY The first viatical settlement companies emerged in the late 1980s, and primarily acted as brokers, matching up terminally-ill policyholders with investors.(15) The initial growth of the viatical industry was primarily a function of the lack of any significant alternative available from the life insurance industry. Recently, however, more domestic insurance companies have begun offering accelerated benefits to their policyholders, typically in the form of accelerated death benefits provisions in traditional life insurance policies,(16) and, less frequently, in the form of loans on insurance policies(17) and long-term care insurance.(18) The recent increase in the options available under life insurance policies does not mean that the increasing numbers of policyholders seeking early access to their death benefits is a short-term phenomenon. …