What Disease Prompted the Creation of Viatical Settlements?

The Emergence of a Crisis

The financial product known as a viatical settlement emerged directly from the urgent needs presented by the Human Immunodeficiency Virus (HIV) and Acquired Immunodeficiency Syndrome (AIDS) epidemic in the 1980s and early 1990s. During this period, effective treatments for HIV/AIDS were largely unavailable, leading to a rapid progression of the disease to a terminal stage for many individuals. This grim prognosis created a profound financial crisis for patients and their families.

Individuals diagnosed with HIV/AIDS often faced immediate and substantial financial burdens. Medical care, even for palliative or experimental treatments, was exceedingly expensive, and many patients soon became too ill to continue working. This loss of income, combined with escalating healthcare costs, quickly depleted savings and left many without the means to cover daily living expenses or medical bills. The desperate need for liquidity to manage these overwhelming costs became a pressing concern for those facing a terminal diagnosis.

This dire situation highlighted a critical gap in financial support for terminally ill individuals. While life insurance policies offered a future death benefit, they provided no immediate financial relief to policyholders who needed funds to live out their remaining time with dignity. The specific characteristics of the HIV/AIDS crisis—rapid progression, high care costs, and loss of earning capacity—created an environment where accessing the value of a life insurance policy before death became essential.

Understanding Viatical Settlements

A viatical settlement involves the sale of a life insurance policy by a policyholder who has a terminal illness to a third party. In exchange for transferring ownership of the policy, the policyholder receives a lump-sum cash payment, which is typically less than the policy’s full death benefit. This arrangement provides immediate financial resources to individuals who are facing significant medical expenses or other financial needs.

Once the viatical settlement is complete, the purchaser becomes the new owner and beneficiary of the life insurance policy. This new owner assumes responsibility for paying all future premiums on the policy. Upon the passing of the original policyholder, the purchaser receives the full death benefit from the insurance company. These settlements offer liquidity and financial relief, allowing terminally ill individuals to cover medical treatments, hospice care, living expenses, or to fulfill other personal desires.

From a tax perspective, the proceeds received from a viatical settlement are generally excluded from the gross income of a terminally ill individual for federal tax purposes. To qualify for this exclusion, a physician must certify that the policyholder has an illness that can reasonably be expected to result in death within 24 months. This tax treatment makes viatical settlements a more attractive option for those in dire financial straits, as the received funds are not subject to immediate income taxation.

Broader Application and Development

Following their initial emergence to address the financial distress of HIV/AIDS patients, viatical settlements began to evolve and expand their scope. As medical advancements improved the prognosis for HIV/AIDS, and as the concept gained broader recognition, these settlements became available to individuals with other life-threatening or chronic illnesses. This broadened application meant that individuals with a qualifying terminal illness, regardless of specific diagnosis, could access the value of their life insurance policy.

The growth in demand led to the development of a more formalized viatical settlement industry, with specialized companies and brokers facilitating these transactions. This maturation also prompted a push for greater oversight and consumer protection. State insurance departments and regulatory bodies began to implement guidelines and model acts, such as those developed by the National Association of Insurance Commissioners (NAIC), to govern viatical settlements. These regulations typically aim to ensure fair practices, transparency in transactions, and adequate disclosures to policyholders, protecting vulnerable individuals from potential exploitation.