New Yorkers with HIV who want to sell their life insurance face a chaotic viatical market in 1997. The number of licensed buyers has shrunk by nearly 75%. Payments are now reported to the IRS - and must meet new residency, licensing, and life-expectancy requirements in order to be free of federal tax. And tidal shifts in the supply of money to the market have resulted in dramatically changed offers.

The Market

Like any financial market, viatical settlement reacts wildly to hype about AIDS and news at AIDS conferences - whether it's bad or good.

In Berlin the news was bad - so viatical firms got easy access to cheap bank and insurer funds and made high offers for policies - up to 90% of their face value. In Vancouver the news was good - so bank and insurer money dried up. As at the start of the viatical market, private investor money rushed in to fill the vacuum.

Taxes

As of January 1997 federal legislation makes viatical settlements tax-free. If two conditions are met: the buyer must be licensed in the state of the seller and life expectancy must be certified as less than two years.

The NY Market

For New Yorkers, much of this is bad news. Why? Because NY has strict, expensive licensing requirements it had attracted mostly viatical firms financed with insurer and bank money - the ones that have disappeared. And many investor-financed firms have pointedly refused to apply for licensing in New York.

The result? At last count, an estimated nine out of the thirteen licensed firms in NY are either out of business or out of money. Only two of the remaining four firms are investor-financed - narrowing competitive choice for New Yorkers significantly.

NY sellers can't legally deal with unlicensed investor-financed firms; if they do, their payments, reported to the IRS, will be taxable income. Yet most of the firms New Yorkers see advertised are not NY licensed; most advertisers in fact aren't even firms with their own money but merely brokers which silently get paid 5-8% commissions on a policy's face value.

Offers

While the high offers made possible by cheap funds have become rare, mid-range offers from investor-financed firms have risen sharply.

Here's a real-life illustration of how dramatically - and strangely - these funding shifts have impacted offers:

A person with barely 10 t-cells, who had to be taken off the new drugs, and whose prognosis is poor recently received only mid-60% offers from bank-financed and insurer-financed companies. A person with a high 200+ t-cell count whose life expectancy is very high received a mid-60% offer from a private investor-financed company.

Getting a fair offer may depend now as much on the where the buyer gets their money as on life expectancy.

Offer dynamics

Because bank/insurer-financed firms evaluate the risk carefully and because they buy policies for themselves, they want a sure deal.

Because private investors do not carefully evaluate the policies they buy and because investor-financed firms do not buy policies for themselves, these viatical firms only want a deal - no matter how sure life expectancy is.

Investor-financed firms get their profits through their middle-man fees in putting the deal together and are willing to pay more to make that happen.

The small investors are the ones left owning the policies - and they won't know if the deal was bad for them until a year or two later. Moreover, small investors are usually "pooled" to buy a policy - so they have little ability to check out the facts before purchase. Because of this investor-financed firms especially want policies where the life expectancy is mid-range: 2-3 years out. With life expectancy vague they can claim to investors that life expectancy is really much lower so investors are eager to buy and so high middleman costs can be covered.

However, because these middleman fees are high, the investor-financed firms can't pay much more for policies where in fact the seller truly has a low life expectancy. On a deal there may be commissions to those who

find buyers, those who find the seller, and the deal-maker's fees - making the overhead on the deal so expensive that the highest offer can only be in the low 70% range.

Action: What should a NY seller do?

• Hold off viaticating until the market changes again.
• Find other ways to generate funds. Pay a financial planner experienced in viatication to structure the deal.
• Determine immediately if the seller is licensed in NY.
• Identify how the buyer is financed.
• Get help in negotiating.

Beware false claims that all viatical settlements are now tax-free, that no 1099 forms will be issued to the IRS, that the broker's licensing makes the payment tax-free, or that the buyer's state of residency is what governs.