What is a Viatical Settlement Provider Bond?
Viatical settlement provider bonds are a subset of the broader license bond category that must be filed with the state government agency responsible for regulating the sale or transfer of life insurance policies in the provider’s jurisdiction as a condition of licensure for most viatical or life settlement providers. Viatical settlement providers enter into agreements with life insurance policyholders when a catastrophic accident or life threatening condition afflicts the insured. Providers compensate the insured in a value that is less than the expected death benefit of the policy in return for the policyholder’s assignment or transfer of the life insurance policy to the viatical settlement provider.
Viatical settlement provider bonds must be issued by insurance carriers admitted in the state where the government agency requiring the bond resides. The insurance carrier issuing any surety bond, such as a viatical settlement provider bond, will also be referred to as the “surety company” or the “bond company”.
Why is a Viatical Settlement Provider Bond required?
Viatical settlement providers are required to purchase license bonds by state statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the public is compensated for damages resulting from a provider breaking viatical settlement license law. The surety company provides the government a guarantee (the surety bond) that the customers of a licensed viatical settlement provider will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the provider’s license up to a limit specified in the bond (“penal sum” or “bond amount”). The bond company also directly receives claims from the public and determines the validity of claims. Ultimately, viatical settlement providers are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face indefinite license suspension. Viatical settlement provider bonds refer to the provider as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Viatical settlement provider bond violations triggering a bond payout may include a provider utilizing misleading marketing materials, entering into an agreement with a seller who is not of sound mind, or committing any fraudulent act within the scope of life insurance policy purchase or settlement.
How much does a Viatical Settlement Provider Bond cost?
Viatical settlement provider license bonds generally cost between 2% and 8% of the bond limit.
Example: $10,000 Viatical Settlement Provider Bond Cost
|Credit Score||Premium Rate||Bond Cost|
|680 or above||2.0%||$200|
The actual cost of a specific viatical settlement provider license bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the provider’s license history, experience and creditworthiness.
Is a Credit Check Required for Viatical Settlement Provider Bonds?
Credit checks are required for viatical settlement provider bonds. Ultimately, the surety insurance company determines how it will underwrite and price a surety bond.
How does the wording in the bond form impact the cost of a Viatical Settlement Provider Bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and viatical settlement provider (principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the provider via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a viatical settlement provider bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 viatical settlement provider bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. Surety bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the viatical settlement provider and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the provider failing to pay premiums due, claim payouts, or material changes in the provider’s credit score. Viatical settlement provider bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Viatical settlement provider bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.