Montana State Life Insurance Practice Exam

Is a Viatical contract considered a liquid purchase? Why or why not?

1. Yes, because it has a guaranteed resale value

2. No, because its timing of maturity is unpredictable

3. Yes, because it can be easily cashed out

4. No, because it is always a long-term investment

The correct answer is: No, because its timing of maturity is unpredictable

A viatical contract is not considered a liquid purchase primarily because its timing of maturity is unpredictable. The essence of a viatical contract involves a policyholder selling their life insurance policy to a third party for a lump sum payment, typically due to a terminal illness. The payout is dependent on the life expectancy of the insured individual, which can vary significantly. As a result, it does not provide the immediacy or certainty typical of liquid assets. In addition, the potential for changes in expected maturity, combined with the specific conditions under which these contracts operate, makes it difficult for holders to quickly convert them into cash without potential losses or delays. Unlike financial products that have a fixed maturity date and are actively traded, viatical contracts hinge on uncertain and personal health factors, thereby diminishing their liquidity status.