Question

A firm purchases a life insurance contract from a sick person, then collects the payout when he dies. These types of contracts are called viatical settlements. It is the sale of a policy owner's existing life insurance policy to a third party owner for more than its cash surrender value but less than the net death benefit (Wikipedia). These markets are also referred to as reverse insurance markets. Firms have an incentive to enter into such settlements if they expect the person whose life insurance policy is being purchased to die relatively soon. If the person dies, the firm gets to collect the death benefit.

Answer the following questions below that pertain to viatical settlement markets:

1. Explain why these markets were primarily dominated by HIV patients.

2. Would this type of a market suffer adverse selection problems? Explain your answer clearly. [Hint: Students are advised to look into BHT text or do some Google research on this to be able to answer this question properly. There is the theoretical explanation and then there is what actually happened in the market]

3. Did this market suffer adverse selection?

Answer 1

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A firm purchases life insurance contracts that is for the sick person, and in the end collects money eventually aim for the payout when he dies. The types of contracts are called viatical settlements and there would be depending on the sale of a policy owner's that can create the insurance policy and it can help in the cash surrender value which would lead to the net death benefit.

HIV patients primarily depend on life insurance as they have a short life and there is also a high chance that would lead to death shortly. The life expectancy f the HIV people are limited to the survival of the 10-15 years or maybe within 5 years. The viatical settlements are beneficial as it would help to assure to get the cash shortly. It would help to survive and also to overcome the expenses due to the disease. The viatical settlements are best aided and the safe type of the policies, that would help the insured person to get the money. The insurance company benefits by overcharging as they know the people would die shortly and to secure they aim to get maximum benefit from the short term amount charged.