Viatical vs. Life Settlements: A Comparative Analysis for Investors
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Distinguishing Between Two Similar Concepts
To the uninitiated, the terms "viatical settlement" and "life settlement" may seem interchangeable. While both involve the sale of a life insurance policy to a third party, there is a important distinction between the two that has significant implications for investors.
Viatical Settlements: The Original Market
The modern life settlement market has its roots in the viatical settlements of the 1980s and 1990s. A viatical settlement is the sale of a life insurance policy by someone who is terminally ill, with a life expectancy of 24 months or less. The term "viatical" comes from the Latin "viaticum," which refers to the Eucharist given to someone who is near death.
Life Settlements: A Broader Market
A life settlement, on the other hand, is the sale of a life insurance policy by someone who is typically over the age of 65 and has a life expectancy of more than two years. The seller may be in good health, but no longer needs or can afford the policy.
Key Differences for Investors
| Feature | Viatical Settlement | Life Settlement |
|---|---|---|
| Seller's Health | Terminally ill | Typically over 65, may be in good health |
| Life Expectancy | 24 months or less | 2 to 15 years |
| Risk Profile | Higher mortality risk, lower longevity risk | Lower mortality risk, higher longevity risk |
| Regulatory Scrutiny | High | Moderate to high |
Investment Implications
The shorter time horizon of viatical settlements can lead to higher potential IRRs, but also comes with greater risk. The accuracy of the life expectancy is paramount, and a small error can have a dramatic impact on the return. Viatical settlements also carry a higher degree of reputational risk, as they are associated with individuals who are at the end of their lives.
Life settlements, with their longer time horizons, offer a different risk-reward profile. The impact of a single policy on a portfolio is less pronounced, and the returns are driven more by actuarial science and portfolio construction than by the specific timing of an individual's death. For institutional investors, life settlements are generally considered a more stable and predictable asset class.
The Evolution of the Market
As medical treatments have advanced, the line between viatical and life settlements has become more blurred. Conditions that were once considered terminal can now be managed for many years. This has led to a convergence of the two markets, with many providers now offering both types of settlements. For investors, this underscores the importance of a thorough and independent life expectancy analysis for every policy under consideration.