A federal appeals court has upheld a Virginia law that regulates the sale of life insurance benefits by terminally ill citizens strapped for cash to pay medical bills and other expenses.
Such transactions, called “viatical settlements,” do not violate the Constitution’s commerce clause because Congress has given states the right to regulate the insurance industry, a three-judge panel of the 4th U.S. Circuit Court of Appeals ruled.
Here’s how the settlements work:
A terminally ill patient sells his life insurance policy to a company for a percentage of the face value, based on life expectancy — the shorter the life expectancy, the higher the payout. The company takes over payment of premiums and collects the full benefit when the patient dies.
The viatical settlement industry sprang from the AIDS epidemic in the 1980s, when dying patients desperately needed cash to pay for expensive treatment.
In the case before the appeals court, an AIDS patient whose life expectancy was six to 18 months sold her $115,000 policy to a Texas company, Life Partners Inc., for $29,900, or 26 percent of face value. Virginia law requires such companies to pay 60 percent to 80 percent.
The patient later demanded more money, claiming she was entitled to at least $69,000. The company refused, and the patient complained to the State Corporation Commission’s Bureau of Insurance.
The bureau found that Life Partners was not licensed in Virginia and demanded that the company adhere to the state’s regulatory scheme, which includes protections for all three parties in a viatical settlement. Life Partners sued, alleging that Virginia’s scheme is so broad that it affects commerce occurring outside the state in violation of the Constitution.
The appeals court ruled that a federal law giving states authority to regulate insurance matters also covers viatical settlements. The ruling affirmed a decision by U.S. District Judge Henry E. Hudson.
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