MYTH NUMBER ONE: REGULATION OF THE INVESTMENT
There are two aspects to regulation. Sales agents may tell you and some lawyers believe the investment is regulated as a security by the federal government. If asked to prove their belief, they will not be able to point to anything.
Viatical and life investments are NOT regulated by the federal government. If the company that sells the investment is registered with the Securities & Exchange Commission (SEC), that simply means they register and are required to file certain reports. It is not a seal of approval and reports can be deceiving–until the SEC is made aware of this. Enron and Worldcom are prime examples.
When these investments are regulated as securities, it is by the individual states–under their Blue Sky Laws. Each state enacts its own legislation, and each state enforces (or chooses not to enforce) their own legislation.
For the protection of the insured, state insurance departments regulate the transaction between seller and purchaser and the broker. Not all states have enacted legislation to do so, and the terms of their statutes vary widely. Some, like Texas, simply require registration. Virginia is one state that vigorously defended the violated rights of a terminally ill insured.
MYTH NUMBER TWO: ABOUT THE INSURED’S PRIVACY
The Health Insurance Accountability and Portability Act (HIPAA) prevents settlement companies from disclosing to investors any private information about the insured.
No, it does not and some companies provide everything except the insured”s social security number.
MYTH NUMBER THREE: ABOUT TAX-FREE CLAIMS
- Investors who are told the death benefits are tax-free to beneficiaries are misled. The tax-free status disappears when a policy is transferred for value (for money, to settle a debt, etc.).
- Viators (sellers) who are told the settlement is ta-free MAY be misled. It is tax-free when a Viatical Settlements is paid to an insured whose life expectancy is estimated at less than 24 months. Life settlements–paid to insureds whose life expectancy is greater than 24 months–are TAXED. (Since the settlement is not taxable under certain conditions, if you plan to apply for a senior or life settlement, you are urged to consult with your tax advisor before taking any irreversible action.)
MYTH NUMBER FOUR: ABOUT PREMIUMS
If premiums are paid annually and the insured dies six months into that year, the insurer can keep the “unearned premium.”
Not true. And, in fact, some states require unearned premiums to be refunded with interest, if they are not paid promptly. Some states specifically require unearned premiums to be refunded to premium finance companies, if the premiums were borrowed from a finance company.
MYTH NUMBER FIVE: REGULATION TO PROTECT INSUREDS
Most states have insurance statutes intended to protect people who sell their life insurance to a settlement company.These statutes include a requirement for registration or licensing of brokers and purchasing companies. Check to find licensed companies names in your state. And keep in mind that some states simply collect fees from the companies, but do not enforce their statutes.