02-032 Chapter 539 page 6 This disclosure document is mandated by the State of Maine Office of Securities. Viatical Disclosure Document I Read Before You Purchase We are offering to sell you an investment called a viatical or life settlement contract. A viatical or life settlement contract is an agreement for the purchase of the death benefit of a life insurance policy. The owner of the life insurance policy being sold is called the owner. The individual whose life is insured by the policy is called the insured. Some policies are sold because the insureds are terminally ill and need money for medical treatment or other expenses. Other owners or insureds are only chronically ill or are not ill at all, but want to sell their policies because their families are grown or they otherwise no longer need the life insurance. This latter type of viatical or life settlement contract may be called a life settlement, senior settlement, elder settlement, or other similar name. When the insured dies the investor receives a specific dollar amount that will be greater than the amount paid for the contract. Some companies sell entire policies to investors, and others sell partial interests in policies. If you purchase a partial interest, the remaining interests in the policy will be sold to other investors. RISKS 1. The rate of return on your investment cannot be calculated before the insured dies. The longer the insured lives, the lower the rate of return on your investment will be. No one can accurately predict the actual life expectancy of an insured. Some factors that may affect the accuracy of a prediction are: The experience and qualifications of the medical personnel making the life expectancy prediction; The nature of the insured's illness, if any; Future breakthrough treatments and cures; or If the insured has AIDS, the definition of AIDS used by the viatical company. Predicting the life expectancy of someone who is chronically ill or not ill at all may be even more difficult than predicting the life expectancy of a terminally ill person. 2. American LegalNet, Inc. www.FormsWorkFlow.com 02-032 Chapter 539 page 7 Therefore, investing in the insurance policy of a chronically ill or healthy person may be even more risky than investing in the policy of someone who is terminally ill. 3. You may have to pay money in addition to your initial investment. The insurance company will cancel the policy in which you have invested if periodic premium payments are due and are not made to keep the policy in force. The insurance company will not pay the death benefit if the policy is not in force. Some of the money you invest probably will be set aside to pay premiums. However, if the insured lives longer than expected, you may be required to pay additional premiums to keep the policy in force. Also, you may be offered a policy for which no premiums are being paid because the insurance company has waived the premiums for some reason. In certain circumstances, the waiver of premiums may be cancelled, and premium payments will then be required. You may be required to pay those premiums. It is also possible that the owner or insured will be permitted to keep certain rights under the insurance policy, even though the policy is sold to investors. These rights include the right to disability income and payment for accidental death or disability. If the insured lives longer than expected, you may be required to pay additional premiums to keep these retained rights in force. 4. Being a beneficiary of a policy and not also an owner carries special risks. A person who buys life insurance is the owner of the policy and decides who the beneficiaries of the policy will be ­ that is, who will receive the death benefit when the insured dies. When the policy is sold as a viatical or life settlement contract, investors become the new beneficiaries and therefore are entitled to receive the death benefit. The new owner of the policy may be either the investors themselves or the viatical company. Only an owner of a policy, not a beneficiary, has the right to make premium payments directly to the insurance company so that the policy will remain in force. If premiums are due, and if the funds that have been set aside to pay premiums run out, you will be dependent on the viatical company to collect additional premium money from investors and to pay premiums promptly. If that company goes out of business or otherwise fails to collect premiums from investors, you may not be allowed to pay the premiums yourself if you are only a beneficiary. American LegalNet, Inc. www.FormsWorkFlow.com 02-032 Chapter 539 page 8 5. Term insurance policies carry special risks. A term insurance policy is issued for a specific time period. The insurance company will not pay the death benefit if the insured outlives that time period. If you purchase a term policy, you will be dependent on the viatical company to renew the policy when the term expires. Even if the policy is renewed, premiums may increase due to a change in the health of the insured. 6. Contestable policies carry special risks. The insurance company may "contest" a policy for a two-year period after its issuance if the company finds a reason to cancel the policy. The insurance company will not pay the death benefit if: the insured dies within the contestability period; and the insurance company has a reason to cancel the policy. One example of a reason that an insurance company might cancel a policy: untruthful answers on the policy application. The policy may also be cancelled if the insured commits suicide within the twoyear contestability period. 7. Group policies carry special risks. A group policy insures the members of a specific group of people, usually the employees of an employer. The biggest risk for someone who invests in a group policy is that the policy can be terminated by the employer or the insurance company. Although the policy will contain a provision allowing your interest to be converted to an individual policy, there may be limits or restrictions on the right to convert. Also, the insurance company may charge additional premiums once the policy is converted. 8. Investing IRA money in a viatical or life settlement contract carries special risks. Internal Revenue Code section 408(a)(3) requires that "no part of trust [IRA] funds will be invested in life insurance contracts." This means that the Internal Revenue Service may not allow you the tax benefits of an IRA