“Viaticals: A Matter of Life and Death” by Harris SCHLESINGER
University of Alabama
Life insurance typically is purchased to protect against an untimely death or to provide a bequest after a more timely demise. Since an important element of life insurance is the affordability of premiums as people age, or as their health deteriorates, insurance often entails long-term contracts. Over the duration of the life-insurance policy, the policyholder's preferences and/or life circumstances might change. For example, a change in preferences might occur with the onset of a serious medical condition such as AIDS. A policyholder might, for example, have some expensive but uninsured treatment opportunities. Life insurance contracts sometimes are flexible enough to address these changed preferences, such as allowing the insured to "sell back" the policy at a price that reflects a desperate health status, but the terms often are not generous. The deep discount, with which insurers buy back policies on the terminally ill, has created a market opportunity for viatical companies who will advance a cash sum in return for being named the beneficiary on the policy. This paper examines the market for viatical contracts and concentrates on three issues in particular: (1) How changing needs create a demand for viatical settlements and why this may be preferable to the selling back of policies to the incumbent insurer; (2) The classic adverse selection problem, where private information of the insureds about their own health status affects market equilibrium; and (3) The case where viatical firms and/or insurers have private information or a better capability of interpreting available information.