Deciding the sale of a life policy in the viatical market: Implications on individual welfare

In this paper, we present an economic model that allows a terminally ill policy-holder to decide whether or not to sell (part of) the policy in the viatical settlement market. The viatical settlement market emerged in the late 1980s in response to the AIDS epidemic. Nowadays it is part of the large US market in life settlements. The policies traded in the viatical market are those of terminally ill policyholders expected to die within the next two years. The model is discrete and considers only the next two periods (years), since this is the max- imum remaining lifetime of the policyholder. The decisor has an initial wealth and has to share it between his own consumption and the bequests left to his heirs. We rst introduce the expected utility function of our decisor and then use dynamic programming to deduce the strategy that gives higher utility (not selling/selling (part of) the policy at time zero/selling (part of) the policy at time one). The optima depends on the value of the viaticated policy and on some personal parameters of the individual. We nd an analitical expression for the optimal strategy and perform a sensitivity analysis.