Cash deal for the dying

Death may be preceded by long and costly care. Michael Drewett reports on a plan for the terminally ill

LIFE assurance provides cash for an individual's family to ease the financial burden that death of the breadwinner often brings. However, most people do not live healthily one day and then die the next. There is often a period of gradual deterioration during which expensive care needs to be administered. It is not just the preserve of the elderly, however, to encounter financial problems as a result of medical conditions. Thousands of people of all ages are declared terminally ill every year as a result of medical prognoses, yet at younger ages the sale of a highly mortgaged house is not an option for raising the necessary cash.

On death, liabilities such as the mortgage will be cleared by insurance, but in the meantime - which could be several years - the problems can seem insurmountable. Critical illness insurance may well come to the aid of increasing numbers of people in years to come, but for now 99 per cent of the population still go uninsured.

To provide one solution, a fledgling industry has started "viatical settlements" of life insurance policies, which involves a company buying the death benefit of an individual's life policy at an agreed price. After purchase all future premiums are paid by the buyer. The terminally-ill policyholder benefits from having cash in hand now, and the company recoups its investment when the life assured dies.

Ex-City bond trader David Barclay-Miller, managing director of International Viatical Settlements Ltd (IVS), says: "Many of the leading life companies are now including a terminal illness benefit on life policies. However, death usually has to be expected within six months [a few companies go to 12] but it cannot help policyholders whose cover was arranged many years ago. What we are doing is offering more cash to the terminally ill person than surrender to the original insurer or a sale through the second- hand endowment market can match. We are also accepting contracts with little or no surrender value such as term assurance and whole of life, and simply taking a very informed view on the face value of the death benefit as against actuarial assessment of the medical condition involved."

Clearly, in such a specialised market, all cases are treated individually. If the policyholder survives with a term contract, the company can end up with a worthless piece of paper when the policy expires. General guidelines include that the prognosis of life expectancy must be between six months and five years, and, of course, the remaining term of the life policy (which should be from a well-known insurer) must be longer than life expectancy.

The policy must be paid to date, must not be assigned [such as to a mortgagee] and provision must be made for any dependent children until they are 18. However, an annuity can be arranged from the viatical proceeds to provide it.

Because of the individual nature of each case, companies are reluctant to commit themselves to hard figures on the percentages they are prepared to pay. However, Max Rosen, managing director of Securitised Endowment Contracts (SEC), gives a guide. "The likely figures are between 55 per cent and 85 per cent depending on the type of terminal illness prognosis," he says. "We want a minimum policy size of pounds 110,000, but there are no pre-set maximum levels."

Richard Legg, of Life Benefit Resources, feels that whilst all kinds of terminal illness cases will be considered, the majority will be cancer and AIDS patients.

Mr Barclay-Miller says: "What we are looking at is providing primary insurance for people who are currently shut out from buying cover altogether; in other words the `impaired lives' market. Just because an individual risk is outside normal criteria does not mean it has to be automatically declined, or cannot be actuarially quantified."