Coping With Catastrophe
Please use for reference only.
Copyright © 1999, Bruce Bryant-Friedland. Reprinted with Permission.
Last Modified: November 1, 2001
During a terminal illness, a life insurance policy can become a crucial source of money.
Robin Jafolla found herself in a bind familiar to many with a spouse struggling against a life-threatening disease.
Her husband's cancer not only sapped his strength but also sunk their income.
Albert Jafolla sold his construction business in 1989 and, at first, this money and other savings provided a cushion.
But after nine years, even these resources dried up, leaving the stop-gap measure of credit cards to finance thousands of dollars of bills.
"We kept just falling further and further in debt," said the 53-year-old Titusville resident.
Then Robin Jafolla heard about viatical settlements, a financial transaction in which a terminally ill policyholder sells the policy to get cash while he or she is alive.
Using the World Wide Web, she located Ponte Vedra Beach-based American Viatical Corp. and worked with the brokers there to sell a portion of Albert's $570,000 policy.
"We purchase their life insurance policies, and we give them cash now, instead of when they pass away," said Tim Burst, American Viatical's chief executive. "Many people use their money to get additional treatment. Or they may pay their bills because they can't work any longer. In some cases, they simply disburse their life insurance to the beneficiaries early. It's very expensive to go through a catastrophic illness."
The Jafollas sold $150,000 of the policy in April and received about $69,000 for it, Robin Jafolla said.
That money paid off their debts.
Even so, the couple's income was still not where it needed to be.
So in October, Albert Jafolla sold another $200,000 piece of the policy for more than $90,000 and rolled that sum over into an annuity that will bolster their income into the future.
Many of those facing financial straits similar to the Jafollas don't want to discuss their situation. For many, the prospect of death and the financial impact of paying for a catastrophic illness borders on the taboo.
But Robin Jafolla agreed to discuss her decision because she thinks that many people like herself facing ruin don't realize that during a terminal illness, a life insurance policy can become a crucial source of money.
"People with terminal illnesses often are faced with making a choice among food, shelter and medicine," said William E. Kelley, the executive director of the Viatical Association of America in Washington.
Faced with no money, the terminally ill will sometimes think they have no choice but to forgo their life insurance premium and let their policy lapse, he said.
Viaticals allow those in these circumstances to turn that policy into cash, said Kelley.
"It resolves the dilemma about food, shelter or medicine," he said.
The industry got its start about 12 years ago, and really took off with the AIDS epidemic as many of those suffering from the fatal disease found themselves unable to work but living for several years with a costly catastrophic disease, said Kelley.
Life insurance policies provided an asset that, in some instances, could prevent the further indignity of a sick person using his last cent.
With the medical advances of the 1990's, those suffering from the disease are living longer.
As a result, the original strength of the market for the insurance policy of AIDS patients has weakened.
But the need -- the financial plight of people suffering from lengthy and expensive catastrophic diseases -- has not gone away.
Still, regulators and consumer advocates warn that such sales demand extreme caution.
"There is a whole lot of room for abuse here," said Susanne Murphy, Florida's deputy insurance commissioner. "One of the reasons why a viatical settlement was passed [in 1996] was that the population was deemed a vulnerable population."
In many instances, a life insurance policy was purchased to provide death benefits to those who would be hurt by the economic loss associated with death.
That need should still be considered before any move is made to sell off a policy.
"Viatication should be a last resort," said Gloria Wolk, an advocate in Laguna Hill, Calif., who has published two books on viaticals.
Those companies offering viaticals typically pay far less than the face value of a policy.
"Few people will get more than . . . 60 percent," she said.
The reason that a broker arranging such a purchase will pay so much less than the face value of a policy reflects the fact that a life insurance policy's benefit received in the future is worth less than it would be today.
The purchaser of the right to collect on the death benefit of a policy is also making an assessment of the realistic life expectancy of the person on whom the policy is drawn.
As life expectancy goes down, falling for example to no more than a year or two, the value zooms up.
That's because anyone who owns the rights to collect for that policy can expect to see the face amount within a short period of time.
Bob Hunter, an expert on insurance issues for the Consumer Federation of America, thinks that there are individual circumstances where a viatical settlement makes sense.
But the very first thing someone contemplating selling his insurance policy should do is contact the insurer and see if the company offers an accelerated benefits program, he said.
If it does, this may be a more attractive alternative, Hunter said.
If the insurer doesn't provide such a program, then a consumer needs to take precautions to avoid getting ripped off.
Despite laws, "wheeler-dealer operators" exist out there, Hunter said.
A check with the Florida Department of Insurance can reveal whether a broker has a license and whether there have been any complaints lodged against him, he said.
Then it's important to make sure that one gets several bids, he said.
Each broker deals with several different companies that use their own criteria to decide what a policy is worth. By dealing with different brokers, a person increases the chances that he or she will get a better offer, he said.
"Be incredibly careful," Hunter warned.