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Albany Law Review

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In the late 1990’s, the escalation of AIDS into a national crisis has devastated its victims' health as well as their finances. This crisis generated the need for innovations both in medical approaches to the treatment of AIDS and HIV, and in financial options available to help patients finance their medical and other living expenses. One response of the financial community has been the creation of vehicles to provide terminally-ill policyholders with early access to the death benefits under their life insurance policies, which would otherwise be unavailable to them during their lives.

The article explores the creation and growth of the viatical settlement industry, focusing on the existing regulatory structure and evaluating the viability and necessity of additional regulatory intervention, specifically by the individual states insurance laws. The initial sale of life insurance policies by terminally-ill policyholders, known as viators, to viatical settlement companies is subject to varying amounts of regulation at the state level, typically by a state's insurance department. As a result of the differences in the states' regulations, the sale of otherwise identical policies in different states may lead to different financial outcomes for viators living in different states. While this is not necessarily problematic, these differing results may lead to financial inequities for otherwise similarly-situated viators.

Part I of this Article provides an overview of the creation and growth of the viatical industry as a response to the increasing medical costs and decreasing income streams facing AIDS- and HIV-infected patients. Part II sets out the problem of whether and how to regulate the viatical industry, examining the risks and theoretical justifications for regulating the purchase side of the viatical industry. Part III details the existing regulation of the viatical industry. And Part IV is an evaluation of existing regulations in the viatical industry, in light of the various theoretical rationales for government intervention, concluding that, on balance, some regulation is needed to protect this vulnerable population.

The article concludes by noting that the viatical settlement industry has experienced tremendous growth since it began almost a decade ago. Viatical settlements provide a valuable service to their terminally-ill participants, and at least market rate of return on investment for the viatical settlement companies. But some form of regulation is needed to protect viators and to help correct the current local monopoly and information asymmetries evident in today's viatical industry. The unpleasant economic reality is that the investors in the purchased policies must also be protected in some sense, because without them, even perfect regulation cannot turn life insurance into cash or medical supplies. The NAIC Models are a good start, but the debate on regulation in general, and on the NAIC Models specifically, is far from over. As the viatical industry grows, regulatory constraints on it must evolve as well. Additional concerns could arise, such as the increased incidence of fraud, and, if more traditional insurance companies create or purchase viatical settlement firms, potential conflicts of interest.

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