D I S S E R T A T I O N
R
Cashing Out Life Insurance:
An Analysis of the Viatical
Settlements Market
Neeraj Sood
RAND Graduate School
This document was submitted as a dissertation in September 2003
in partial fulfillment of the requirements of the doctoral degree in
public policy analysis at the RAND Graduate School. The faculty
committee that supervised and approved the dissertation consisted of
Dana P. Goldman (Chair), James N. Dertouzos, and Steven Garber.
The RAND Graduate School dissertation series reproduces dissertations that have
been approved by the student’s dissertation committee.
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Abstract
People near the end of their lives are too frail to work, have low incomes and
often lack health insurance coverage. Consequently, these people are often under
extreme financial stress – they need cash now to buy life saving treatments and but do
not have enough income or liquid assets to pay mounting prescription and doctor bills.
Such people are increasingly using a new financial vehicle called a viatical settlement.
These settlements which first arose in the context of HIV, allow policyholders to convert
their previously non-liquid life insurance policies into cash at a discount to the policies’
face value. (The discount depends on life expectancy.)
Despite its growing importance, there has been little scrutiny of the viatical
settlements market. This dissertation fills this information gap by conducting two
separate analyses of the viatical settlement market using a unique database of viatical
settlements involving HIV+ patients
The first analysis, evaluates the impact of existing minimum price regulations in
the viatical settlements market. These price floors are perhaps the most controversial of
the current regulations, thus a good candidate for analysis. The viatical settlement
industry argues that the price floors are set too high and thus make it unprofitable to
buy polices at the minimum mandated prices. On the other hand, insurance regulators
argue that price floors are necessary to guarantee a fair rate of return to the sellers in
these market who otherwise might fall prey to high-pressure marketing tactics of
viatical settlement firms. The results of this analysis show that price floors bind on HIV
patients with greater than 4.5 years of life expectancy. Furthermore, HIV patients from
states with price floors are significantly less likely to viaticate than similarly healthy
HIV patients from other states. Finally, the magnitude of welfare loss from these
blocked transactions would be highest for consumers who are relatively poor, have
weak bequest motives and have a high rate of time preference.
The second analysis, evaluates consumer decisions in the viatical settlement
market. In order to make optimal decisions, consumers deciding between selling their
life insurance and borrowing should be able to do two things (1) accurately assess their
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mortality risks (2) compare the real (rather than nominal) cost of selling life insurance to
the cost of borrowing. This analysis tests whether consumers can perform the above
two tasks well. The results of this analysis suggest that consumers do make mistakes in
deciding between selling their life insurance and borrowing The empirical evidence is
consistent with two hypothesis motivated by the psychology and behavioral economics
literature – (1) relatively unhealthy consumers are too optimistic about their mortality
risks (2) consumers tend to focus on the nominal prices, rather than on real discounted
expected price.
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