Pacific West Capital Group reminds investors that the owners of life insurance have always enjoyed the right to offer their policies for sale provided they could find an investor willing to purchase it. The transactions were largely unregulated by the states or the federal government. The only thing holding back the sale of life insurance policies was the limited market for this form of investment vehicle.
The 1980s saw the emergence of a secondary market for life insurance policies offered by owners suffering from terminal illnesses. Investors offered policy owners substantially more for their life insurance than the insurance companies were offering as cash surrender values. Investors buying the policies could reap significant returns on their investment dollars when the insurance companies paid out on the death of the insured.
Unlike life settlements of today, such as those offered by Pacific West Capital Group, the problem with the viatical settlements of the 1980s and later was that they were predicated upon a diagnosis of a terminal illness. If the person died, the investor received the death benefit payment as the beneficiary, but if the insured recovered and went on to live for many years, the investor was forced to keep the money invested tied up in an insurance policy that paid not annual return on investment.
Viatical settlements were plagued by problems such as fraud and misdiagnosis. Policy owners misrepresented their medical conditions and backed it up with phony medical reports. Even in the absence of fraud, a misdiagnosis or the development of a breakthrough cure could extend the life of the insured beyond the life expectancy anticipated by the investor at the time of entering into the investment.
Another problem with viatical settlements is that insurance companies were quick to challenge the right of a beneficiary to collect on the policies after the death of the insured. The failure of an insured to disclose existing medical conditions at the time of application for the policy could provide grounds for the insurance company to contest paying out the proceeds of the policy.
Taking a lesson from the mistakes made by investors in viatical settlements, the life settlement industry grew in the 1990s by offering elderly policy owners the opportunity to sell their life insurance. No longer relying on the existence of a terminal illness, life settlements focused on life expectancy of an insured based on the person’s age, the existence of chronic or degenerative conditions and lifestyle.
Companies such as Pacific West Capital Group know that the time between investment and payout is narrower in a life settlement than with viaticals because death from old age can be predicted with more accuracy than a death from an illness.
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