In addition to the same risks that are involved in traditional viatical settlements of terminally ill persons (such as fraud, “wet policies” and “clean sheeting”) life settlements of healthy persons involve additional consumer issues, such as a fair valuation of the policy, the transaction costs (typically the broker takes away far more in commissions and expenses than the policy owner receives for the policy), proper income tax treatment, the impact of the life settlement on eligibility for government assistance, rights and Investor/purchaser issues.
In most states current viatical settlement laws do not address purchaser protections, nor is there a sophisticated network of regulations protecting investors. In a number of circumstances investments in viatical settlements or life settlements would be regarded as “securities” under the traditional Federal or state securities laws. Some states have also enacted laws or regulations that specifically treat viatical settlements and/or life settlements as securities. Other states treat them as special types of insurance transactions.
Potential purchasers should check with state insurance and securities regulators to determine if viatical or other settlement transactions are regulated in that state. While some states do regulate these transactions, others remain silent on the subject.claims of family members, creditors and many other issues.