Warning: Viatical Settlement

Interest rates are at their lowest levels in 40 years. Yields are too low for many people to meet their goals. That sends them in search of higher yields, and that attracts the scam artists.

One spreading scam involves something known as a “Viatical Settlement.” The viatical settlement is a legitimate arrangement, but many of those purporting to sell the investments are in fact con artists using the concept to steal money, especially from seniors.

A viatical settlement is fairly simple. A terminally ill person needs cash to pay medical bills or other expenses. The ill person owns a life insurance policy, but that money generally isn’t available until after death. To get cash now, the ill person finds an investor and names the investor as full or partial beneficiary of the insurance policy. In return, the investor gives the ill person cash. The transaction sometimes is known as accelerated benefits or living benefits. This is all legal and legitimate if the parties agree to the terms.

The key is the amount of cash involved. The ill person naturally believes he should receive most of the life insurance benefit amount, because the doctors reported he is certain to pass away within a certain period. The investor believes he is taking a risk. There are many cases of patients recovering from terminal illnesses without explanation or living longer than expected. Or a treatment could be developed.

Viatical settlements used to be private transactions between individuals. When AIDS became a household word, however, investment pools were formed to buy large numbers of life insurance policies from the terminally ill. Now, invitations to join a viatical investment pool are common. Many of you have received the sales pitches.

The early investors in viaticals were well-rewarded, earning annualized returns of 15% or more. That attracted a lot more people to the investments and created a number of problems.

• Viatical settlements generally are unregulated investments. Most investments meet the legal definition of a “security” and are regulated by the SEC and state agencies. Viaticals aren’t securities. In many states, anyone can sell them and take a commission. In other states, the salesperson might need to be only a licensed insurance agent. 

  Because of the lack of regulation, advertising is wide open. Many promotions say high returns of more than 100% are guaranteed. The return of your initial investment is counted as part of that “return.” Investors often are given very little details about their investments. Many receive only a list of insurance policy numbers and the benefit amount. They are told that everyone insured under the policies is sure to die within a year or two, but aren’t given anything to support the statement.

   

• Some viatical firms are frauds that don’t even buy insurance policies. They take investors’ money and spend it. Investors are left with little or nothing. 

   

• Some frauds recruit sick people to buy insurance policies with less than $100,000 of coverage, for which no medical exam usually is required. The firms buy the policies and in turn sell them to investors. If the insureds die within two years, the insurance companies can refuse to pay the benefits because of the fraud. 

   

• Other frauds recruit healthy older people to buy life insurance, and then buy the policies from the seniors on behalf of investors. The insured seniors can live for years since they are healthy. These are known as senior settlements, and some firms will sell them to investors under that name. Investors should be aware that with senior settlements there is no indication how long the insured will live. 

   

• The policy might be term insurance instead of whole life or another permanent policy, and that fact might not be disclosed. If the insured outlives the policy term, the investor gets nothing. 

Even in the best of circumstances, it is difficult to get a good return from a viatical investment. Traditionally, a viatical firm would give the insured 50% of the policy amount in return for receiving 75% of the benefit. The insured would determine who got the other 25%. The investor would get the rest of the death benefit, minus a commission of 20% to 30% for the viatical firm.

To make a good profit for investors, the viatical firm has to determine that the insured really is terminally ill and estimate the life expectancy. The longer the insured lives, the lower the annualized return is to investors. If the insured lives a year or two longer than expected, the investor would have been better off investing in corporate bonds.

After viaticals became popular in the 1990s, a flow of new money created competition among investors. That pushed up the amount the insureds could demand, and reduced the potential returns to investors.

If you are interested in viatical settlement investments, read Viatical Settlements: An Investors Guide by Gloria Grening Wolk (Bialkin Books; 888-798-2665) or visit the author’s web site www.viatical-expert.net. Also, the National Viatical and Life Settlement Association of America has a model standard of conduct with a good list of the information you need before investing. Items include a photo and street address of the insured, an original or copy of the insurance policy, verification of coverage from the insurer, and medical documents including physician’s statements and laboratory tests. Don’t settle for a simple paper with policy numbers, benefit amounts, and “guaranteed” returns. You need a lot of information to profitably invest in viatical settlements.

The model standard of conduct is on the web site at www.viatical.org or contact the association at 800 Mayfair Circle, Orlando, FL 32803; 800-842-9811. Before investing, also contact your state’s attorney general’s office to see if complaints have been filed against any firm selling viaticals.