Life settlement and viatical glossary

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Accelerated death benefit, also known as living benefit – Life insurance proceeds paid to a terminally ill person before his death. Any remainder is paid to the beneficiary after the insured’s death. Generally your life expectancy must be six to 12 months and you may receive 25 percent to 75 percent of your policy’s face value.

Agent – A life insurance or life settlement agent (also called a producer) is an individual who has direct client relationships.

Beneficiary – The party named by the policyholder who receives the proceeds of the life insurance after the insured’s death.

Beneficial interest – The rights to receive distributions of interest or principle from a trust.

Brokers – People who facilitate a life settlement or viatical transaction by referring the insured to one or more life settlement companies for offers for the policy.

Cap Rate – Capitalization Rate – A financial projection used to make assessments about the investment under consideration. Profit return is anticipated on a yearly basis. It is calculated by dividing yearly profit by the original amount to be invested.

COI or Cost of Insurance – A term describing the issuing life insurer’s monthly premium charge to keep the death benefit active.

Contestable life settlement – A transaction that takes place during the two-year contestability period. They are often referred to as “wet paper.”

Disability waiver – A feature in some life insurance policies that keeps the policy in force but forgives the payment of premiums if the insured is totally disabled. Such a feature boosts the value of your policy should you want to sell it to a life settlement or viatical company.

Escrow – Funds held by a third party until the conditions of a contract are met. In life settlements or viaticals, the lump sum paid to the insured is held in escrow until the transfer of ownership and change in beneficiary are recorded. The buyer normally deposits the purchase amount into an escrow account pending the completion of the transaction.

Funding company – A company that raises capital to buy life insurance policies.

Group life – Policies, usually term, purchased through a group, normally an employer. To be sold in the life settlement market, a group policy must generally be converted to an individual policy first to be of interest to an investor.

Insured – The person whose life is covered by the policy.

Life expectancy or LE – An estimate by medical actuaries as to the expected duration that an individual is likely to live. Assessments are generally made based upon demographic stats as well as a review of the individual’s medical records.

Life expectancy evaluation provider – Companies that specialize in providing life expectancy estimates so that a life settlement provider can calculate an offer.

Life settlement – Proceeds from the sale of a life insurance policy to a third party.

Originator – A company that locates policies and screens them for eligibility for a life settlement, including verifying that the policy is in force, obtaining consents and disclosures, and submitting cases for life expectancy estimates.

Net death benefit – The amount of the life insurance policy to be viaticated minus any outstanding debts or liens.

Providers – Providers act much like mortgage bankers in the real estate market. They typically receive cash or credit lines from institutional life settlement investors and work within established insurance guidelines to determine what types of policies to purchase for the account of the investor.

ROI or return on investment – The percentage profit return anticipated or earned on a yearly basis. It is calculated by dividing the expected or actual yearly profit by the original amount to be invested.

Seasoned paper – Industry slang for life settlement policies sold after the two-year contestability period has elapsed.

Secondary markets – This is a market for previously issued and outstanding securities. These markets do not include a “Provider,” a “Purchaser,” a “Financing Entity” or a “Special Purpose Entity,” but does include any person who is a qualified institutional buyer or accredited investor.

Servicer – The company that contacts the insured periodically to confirm current health and medical status. Upon the death of the insured, the servicer may also be in charge of obtaining the death certificate.

Stranger-originated life insurance (STOLI) – When a speculator convinces a senior citizen to buy a life insurance policy for the sole purpose of transferring the policy to the speculator shortly after the sale. Seniors may get a sales pitch about “free” or “no-cost” life insurance rates or other financial incentives.

Term life – Policies that pay a death benefit but do not build up cash value. Term life insurance policies are normally guaranteed renewable for a specified period of time, or up to a certain age, although premiums can escalate sharply. Level term policies keep premiums fixed for specified periods such as 10, 20 or 30 years.

Universal life insurance – A life insurance policy that offers flexible premiums and an adjustable death benefit and allows premium payments to be skipped, provided there is enough cash value to cover them. The cash value account typically earns a money market rate of interest. Death benefit amounts can be changed during the life of the policy within limits, generally subject to medical examination.

Viatical settlement provider – This means is person, other than the policy owner, who enters into a sales contract with an owner. A provider does not include:

Any bank, savings bank, savings and loan association, credit union or other licensed institution which takes an assignment of a life insurance policy or certificate issued pursuant to a group life insurance policy as collateral for a loan.
A natural person who enters into no more than one agreement in a calendar year for the transfer of a life insurance policy, for compensation or anything of value less than the expected death benefit payable under the policy;
A purchaser; or any authorized or eligible insurer that provides stop loss coverage to a provider.
A financial entity such as an investment company or merchant banker.
A special purpose entity such as a subsidiary, partnership, trust or an unicorporated structure.
A related provider trust.
A broker.

Viatical settlement – Proceeds from the sale of a life insurance policy to a third party by a terminally ill person. This is a secondary-market transaction when an individual who has less than 36 months to live sells their life insurance policy for cash upfront.

Viaticate – To sell a life insurance policy to a third party.

Viator – A terminally ill person who sells his life insurance policy to a third party for a lump sum.

Whole life insurance – Life insurance for your entire lifespan with a fixed premium. These can build up cash value.