Viatical Settlements – their existence is good even for consumers who never use them

A secondary market for life insurance policies helps policyholders and incumbent insurers.

Other financial service industries have secondary markets: e.g., home mortgages, catastrophic risk insurance, and Nasdaq-listed securities.

There are theoretical reasons to allow a secondary market for life insurance, and anyone who favors market economy should be in favor of them. Without an active secondary market, the equilibrium quantity of impaired policies that is surrendered is inefficiently low.

Competition among insurance companies in the primary market leads to competitive surrender values when the insured person has normal health, but surrender values based on normal health do not appropriately compensate individuals with impaired life expectancies for the resulting appreciation of their policies. If there is no external market for reselling policies, insurers have no incentive to adjust their surrender values for impaired policies to competitive levels. The insurance companies are effectively “monopsonies”, markets where there is only one buyer. Monopsony buyers don’t have to pay a fair value.

Viatical and life settlement firms erode this monopsony power; they make the market more efficient and fair.

The benefits of an active viatical market to policyholders and incumbent insurers in the primary market are positively correlated to the quantity of coverage sold to viatical firms and to the improvement in the terms of accelerated death benefits offered by incumbent carriers.

Life insurance companies may try to discredit the viatical industry partly because they want to maintain monopsony power.