Scenario (illustrative numbers): A owns a $1,000,000 policy and is diagnosed with cancer, with about two years to live. A sells the policy to a settlement company for $700,000 in cash. The company becomes owner and beneficiary, keeps paying the premiums, and collects the $1,000,000 when A dies.
Who's who:
Viator: the ill owner who sells the policy.
Provider: the company that buys the policy.
Broker: negotiates for the owner. In California a life settlement broker represents only the owner and owes the owner a fiduciary duty. A life agent licensed for at least one year is deemed to meet the broker licensing requirements: the agent notifies the Commissioner within 10 days of first acting as a broker and pays $85 for each license term, and the 15-hour life settlement education requirement does not apply (§10113.2(b)(1)).
In textbooks, a viatical settlement involves a terminally ill insured; a life settlement involves an older insured who no longer needs the coverage.
California rules (Ins. Code §10113.1 et seq.):
California regulates both under its life settlement law. Terminally ill means an illness reasonably expected to result in death in 24 months or less.
The settlement must pay more than the cash surrender value or accelerated death benefit available at the time.
The owner may rescind within 30 days after the contract is signed by all parties and the disclosures are received, or 15 days after receiving the proceeds, whichever comes first, by giving notice and repaying the proceeds (§10113.2).
Stranger-originated life insurance (STOLI), a policy started for an investor who has no insurable interest, violates California law.