Until recently, HR managers had one choice: to help the terminally ill individual find a way to spend down assets and become eligible for public benefits. Minimizing income and assets is the route to eligibility for such means-based entitlements as Medicaid and Supplemental Security Income.
These entitlements mean living in a bureaucratically defined poverty, in which income barely covers medical expenses and food, and which requires the person to endure the long and often maddening process of qualifying that requires submitting reams of paperwork. As a recipient of means-based entitlements, your former employee would be unable to do any financial planning. The limitations of the system would require her to divest herself of all but about $2,000 in assets and $650 a month in income.
Thanks to an alternative developed in the late 1980s, this grim scenario isn't the only choice for an employee facing terminal illness. Now human resources managers can help employees explore viatical settlements, which enable a person facing terminal illness to sell a life insurance policy for cash to a group of investors, who then become the beneficiaries of the policy upon the death of the policyholder.
Viaticum is Latin for "provision for the journey." Viatical settlements are a new and growing option for the people taking that journey-the final months of life-and who want to do so with dignity and self-determination. Peggy Wallace, who is president of Affirmative Lifestyles Inc. in San Antonio, says that choice is the essence of the viatical-settlements issue. "There's dignity in having choices," Wallace explains.
"The terminally ill person is looking for quality of life and standard of care, and shouldn't be forced to become prematurely Medicaid-qualified. Spending down all one's assets is comparatively easy as long as you aren't the one who's doing the spending-down," Wallace points out.
Viatical settlements aren't for everyone, but employers and human resources managers need to know that the choice exists. Thorough and competent counseling of an employee who has a terminal illness depends on being aware of all of the alternatives. Since 1987, more than 20 viatical-settlement companies have emerged throughout the U.S. to meet the financial-planning needs of people who have fewer than two years to live. These companies are for-profit enterprises, investment groups that have complex and multiple motivations, so the buyer must beware. Used wisely, they can be a source of cash for someone in extraordinary, end-of-life circumstances.
The concept was developed to offer options.
The idea of viatical settlements first emerged in the mid-1980s in the minds of several creative people who had insurance backgrounds. The idea was that financial planning could repackage existing assets to create the possibility of dignity and choice for individuals who have a terminal illness.
Although there's no designated pioneer in the field, Rob Worley, president of Living Benefits Inc. in Albuquerque, New Mexico, is considered by many to be the first person to explore the possibility of viatical settlements. For Worley, who also is the president of the newly formed National Association of Viatical Settlement Organizations, the seed sprouted while he was listening to a radio call-in talk show during a tedious three-hour nighttime drive in New Mexico.
A 36-year-old caller who had no family had just learned that he had only six months to live. He had called his life insurance company to ask if it would buy back his policy. When the insurance company declined, the caller had approached his bank, only to learn that buying out the policy would be a violation of federal banking regulations. Did the talk-show host know of any alternatives? He didn't. No one did.
Worley couldn't get the caller out of his mind. He researched the laws governing such transactions in all 50 states. He asked friends in the insurance industry how often such requests came in, and found that each of the firms in which he had contacts averaged four calls a week. They, too, turned down such requests. In April 1989, Worley's company, Living Benefits, bought its first policy.
For Wallace, the president of Affirmative Lifestyles, the idea for viatical settlements sprang from the request for financial advice from a longtime colleague. She knew he'd been battling illness, and she had sent him occasional get-well cards.
Trusting her empathy, her colleague told her that his diagnosis was AIDS. He had to plan for the period during which he would be ineligible for COBRA and his disability insurance wouldn't cover his obligations. They explored traditional and nontraditional places in which to tap some cash, including negotiating directly with his life insurance carrier for a predeath sale of his policy.
Wallace's client was bright and successful, and had a marketing background, which they would be able to use to determine whether others had the same need. They learned that others did. When Wallace realized that direct negotiation with insurance carriers couldn't take place on a wide scale, she came to the conclusion that the enterprise would have to go private. Affirmative Lifestyles is structured to cover AIDS patients, but Wallace intends to explore making it available to any person who has an "actuarially determined, shortened life span."
Steven Simon's background is in property and casualty insurance. Simon's volunteer work for people who have AIDS was the spur to exploring viatical settlements. His company, American Life Resources Corp., operates out of Miami. Although he spent most of his time during the early stages of the company's development locating investors, he has established lines of credit that allow the company to keep pace with demand.
According to Simon and other owners of viatical-settlement companies, the demand is growing. Many people in the field identify AIDS as the diagnosis that provided the initial sense of critical mass, and now viatical settlements are becoming available to people who have a number of diagnoses. For example, Living Benefits plans to consider congestive heart failure, renal failure and several types of cancers. Affirmative Lifestyles also is interested in responding to inquiries about several cancers.
Because viatical-settlement companies arose largely in response to the demand created by single men who had AIDS, the expansion of the epidemic and the consideration of other diagnoses are opening a new challenge: how to arrange a viatical settlement when the recipient of the settlement is married and lives in a community-property state. One approach to this challenge is to find a way to sell off 50% of the policy, leaving the spouse's 50% intact.
Another option being explored aggressively by a new company, Contemporary Life Benefits Inc. in Walnut Creek, California, is arranging for structured settlements in an annuity-type agreement. A lump sum that's followed by periodic smaller payments can create opportunities for people who have longer life expectancy than two years.
Alan Sternberg, chairman and CEO of Contemporary Life Benefits, says, "Oncologists feel that this will extend life, provide better treatment, offer dignity and give doctors treatment options they didn't have before because of funding limitations."
Despite these benefits, it's important to know that viatical settlements can involve a potential conflict of interest. Any person who has a terminal illness and decides to use such a settlement must be aware of health care providers and others who view the income as a windfall. For example, a doctor who suggests a whole new course of treatment once the settlement comes through may not have the patient's best interest in mind.
HR executives can contribute valuable expertise.
How does this process work for an employee sitting in your office who may not be aware of viatical settlements? You can alert the employee to the option by understanding the alternatives. Because you may be the original source of information about this option for the employee, you should advise him or her to take advantage of legal counsel and to obtain the advice of a good financial planner. (See "Seven Ways HR Can Help with Viatical Benefits.")
Should the individual elect to explore a viatical settlement, the organization has, according to Simon, the "social responsibility to help alleviate financial hardship for a terminally ill employee." Nancy Cane, who is the director of administrative services and the corporate secretary of Contemporary Life Benefits, believes that the role of the human resources manager can't be overemphasized. Because she has worked with many helpful human resources managers, Cane insists, "Their role is paramount in assisting the disabled employee." The process involved is paperwork-intensive and demands a high commitment to confidentiality on the part of managers. Here's an example:
Blair, who asked that his real name not be used, is a 31-year-old man who had worked as an assistant in a law firm. He had explored the idea of a viatical settlement because of his AIDS diagnosis. After seeing an ad in the newspaper, Blair called the viatical-settlements company for more information and an application. He then approached the benefits manager of the law firm for which he worked and asked for assistance. Although Blair was skeptical throughout the process, he wanted to believe that it could work for him.
"I had a considerable amount of debt that I wasn't going to be able to service on my disability income, which was only 60% of my regular income," he explains. "My medical coverage is sound (I'm also on experimental studies at the National Cancer Institute, which covers a lot of medical expenses) and my company has kept me on full benefits. Yet I knew that, somewhere down the line, I would need a considerable amount of money that I wasn't going to be able to make. Knowing that you won't be able to pay your bills is scary. I didn't want to file for bankruptcy. I knew that if the viatical settlement didn't come through, my parents wouldn't be able to help me-I didn't want them to. I was in better financial shape than a lot of AIDS patients who go out on disability, yet I knew that the needs would exist," he explains.
Blair's group life insurance policy through his employer was underwritten by Northwestern Life Insurance. He explains that once his benefits manager at work understood the need, she cooperated fully, working directly with the viatical benefits company to provide the copies of the policy and other required paperwork.
"When the human resources people realized that it would benefit me, they were great. The trust and estates lawyer was interested in it and gave me good advice. There was never any discouragement from any of them," Blair says.
With relief, Blair reports the success he had with his viatical settlement because the diminished stamina caused by the illness had left him emotionally incapable of fighting bureaucratic battles. He says that most people who have a terminal illness try to work until they absolutely have to stop because they need the income and the medical coverage. In addition, they've already spent months worrying about how the company will react when disability leave becomes the obvious next step.
Blair admits that he was "absolutely scared." "They told me, 'We've never required that a disabled employee pay for benefits. We've always continued those benefits.' Yet I knew that it wasn't written in stone," he says. His viatical settlement ended that anxiety.
Blair has paid off many of his debts. He knows that he has cash for the extraordinary medical costs he knows he can expect. "This certainly gives me the best peace of mind I've had since developing this illness," he says. Blair knows that he can't budget his settlement; too much in his life is unpredictable. So 75% of his settlement remains unspent, a comfort and a hedge.
Not all programs are equal.
Advisers to people who are terminally ill often express doubts and concerns about viatical settlements, usually because a for-profit enterprise arising out of the tragedy of a terminal diagnosis makes them squeamish about the motivation of the investors. Other people question the percentage of face value that the terminally ill person receives, typically from about 55% to 80%.
Wallace says that she would be glad to operate in a nonprofit environment and imagines, "If all you need is $1 million, you can raise it." To meet the demand, however, Wallace says, "You'd need to raise $100 million, so it's a different situation." Only in the for profit environment, she says, can enough cash be raised. This prevents the need to turn away everyone else in line after a limited reserve has been used up.
As to the percentage of face value that clients receive, Worley points out that the viatical company has to buy the patient's medical records. The ultimate cost to the company is $3 a page if the going rate is $1 a page. Then the company also must continue to pay the insurance policy's premiums until the patient's death.
Sometimes the viatical-settlement company suffers fraud or has clients who survive longer than expected, which seriously reduces its capital. "Actuaries are baffled by this one; normally they can't develop actuarial tables short of 1,000 deaths. The whole industry is nowhere near 1,000 deaths yet," says Worley. His company bought the first policy in 1989. Worley describes the client as a man who had 20 months to live and was "far down the line" in the progress of his disease. The man is still alive.
As in any industry, there are unethical companies in the viatical-settlements market. Some give the clients unreasonable deadlines (such as 24 hours) for making a decision about an offer. Others hound a client who accepts another company's offer, demanding money for having invested in the client to obtain his or her medical records.
One horror story involves a client who had assigned benefits to the viatical company as agreed and four months later still hadn't received a check. Four months' time is qualitatively different to someone facing terminal illness; it's much longer than four months in the life of a healthy person trying to cut through red tape.
As a result, states throughout the U.S. are beginning to regulate viatical-settlement practices. The first state to pass laws governing viatical companies was New Mexico. California and Kansas have begun to regulate the industry as well, with California becoming the first state to establish licensing procedures for companies that enter into living benefits life insurance contracts. The California Commissioner of Insurance is watching the development of viatical companies because, as the founder of one viatical company says, "Regulators in California are determined to keep this industry clean."
Despite the potential problems, terminally ill employees are finding that the benefits of viatical settlements outweigh the problems. For example, Paul, a 42-year-old businessperson, says that it doesn't bother him that viatical companies operate as for-profit businesses. He understands that when he dies, someone else will reap the full benefits of his policy. "I don't see that as greed; I see it as a business dealing. It was done correctly," he explains.
Noting that some companies demand a decision within 24 hours of the time the settlement is offered, Paul believes that, by contrast, he was allowed to complete the process in his own good time (about four months). He wasn't rushed, and he received what he feels was a fair percentage of the face value of the policy.
Because viatical settlements may be a terminally ill employee's best option-a way for that person to die with dignity and a sense of control over his or her last days-human resources managers at least should inform employees of the option. How important is this? Wallace puts it this way: "Close your eyes. Set the scenario. If it were you..."
Personnel Journal, January 1993, Vol. 72, No. 1, pp. 78-83.