Most of us have never heard of Viatical Settlements or Life/Senior Settlements yet almost every state in the Union has a consumer watch posted about investing in them. Each watch cautions potential investors about putting their money into these investments, which has its roots going back to the AIDS epidemic of the 80’s.

Simply put, when you buy a Viatical, you purchase the life insurance policy of a terminally ill person at a discounted price from a viatical sale agent who receives a commission. The sales pitch is very persuasive. By your purchasing this policy you are providing a terminally ill individual with the cash to pay for medical expenses or the ability to live out their lives in comfort thereby performing a humanitarian act while making a hefty profit when they shortly die.

With the advancement of medical care and technology Viatical sales have fallen because the terminally ill persons refuse to cooperate and die thereby making the rates of return not as attractive as purported in the sales pitch. So the industry has added to its portfolio the sale of Life/Senior Settlements. In the Life/Senior Settlement scheme the investor is offered the life insurance policy of an older, healthy person (minimum age 65). Although the length of time for return on investment is longer (this one is based on actuarial tables versus medical reports) the promised rates of return can be upwards to 40%. With these high rates of returns and the feeling that by providing money to people who need it these investments are very attractive to older investors.

I have visions of viatical company executives sitting around a table looking at prospective candidates and saying, “This guy is 68, has had two heart attacks and still smokes. He’ll be gone within 24 months. He’s prime meat”. As gruesome as that might seem, I suspect it is looked at in that manner.

The State of Michigan has an eight page guide to investing in Viatical Settlements. On page one it states: “ WARNING: Do not invest in viatical settlements until you have read the following information”.

It goes on to outline some of the pitfalls associated with buying a viatical:

• Rates of return may be projected but cannot be guaranteed – medical science advances every day prolong the life of all of us. What was terminal yesterday is curable today making the rates of return smaller every year a person continues to live.
• No one can accurately predict the life expectancy of a viator (the person who sold the policy) – Viatical companies have over stated the poor health of those individuals whose policies they are selling. Fake doctor’s reports have been used repeatedly.
• Who is responsible for paying premiums – although most viatical companies collect enough money from investors to keep policies going if they should run into financial trouble or go out of business you may be required to pay the premium to keep policy in force or lose you investment.
• Term insurance policies have unique risks – term insurance has a definite period of time when the policy is in force and then it expires. Should your “investment” not expire within that period of time you may have to renew the policy at a high cost out of your own pocket.
• Group policies are also unique – policies that have been converted from a group policy may have restrictions that could cause a problem for an investor.
• Most policies have a contestability clause – should a viator die within the first two years of the policy the insurance company could very well “contest” the claim and refuse to pay. If they believe that there is legal justification for contesting the policy payout you may lose your whole investment.
• The policy may also be contested by family members – after death the family may claim the proceeds feeling the individual was defrauded into selling the policy in the first place.
• IRA tax benefits may not be available if IRA funds are invested in viatical settlements – IRS code section 408(a)(3) requires that, “no part of trust (IRA) funds will be invested in life insurance. Plus if you have used IRA money and you reach 70 1/2 years old you must take a distribution but the viatical has not died you will be in penalty mode because you can’t take any money from investment.
• Viatical settlement investments are not liquid investments – until they die your money is tied up and there are very little secondary markets for the reselling of viatical settlements.

The North American Securities Administrators Association (NASAA) calls viatical one of its top ten investment scams. In July of 2000 a Florida Grand Jury found as much a 40-50% of the life insurance policies viaticated by viatical settlement providers may have been written under fraudulent means. The SEC has taken action against one viatical company which it claims has defrauded 30,000 investors of $1 billion. Michigan has passed legislation which makes viatical settlements a securities transaction yet they are sold by people who are not licensed to sell securities daily.

I have had clients who have invested in viatical settlements who are still waiting for their money and will mostly likely never see a return on their investment. The company they put money into has gone bankrupt, the agent left town and they have no recourse left to them. To me it’s too creepy. If I were the viator I’d find it hard to sleep knowing a person is sitting around waiting for me to die to make money and the sooner I go the better their return-on-investment. As the investor I hate to think that instead of looking at the stock market pages in the newspaper I turn to the obituaries to see how my investments are going. No matter how you look at it Viatical and Life/Senior Settlements are bad investments and should be looked at very, very closely before you consider committing your money to the grim reaper.

Fred L. Goldenberg is a Certified Senior Advisor and the owner of Senior Benefit Solutions of Michigan. He is also a founding member of the Senior Resource Alliance of Northern Michigan.