Viaticals: Watch Out!

By: AARP

James thought he was doing the right thing when he invested $50,000 in a viatical contract. The retired investor was told he would be making a humanitarian investment by purchasing the life insurance policy of a terminally ill person and that he could expect a large profit for himself. But the insured person wasn’t really sick at all and James was forced to pay the policy premiums to avoid losing his investment.

How Viaticals Are Supposed to Work

When you buy a viatical, you purchase the life insurance policy of a terminally ill person at a discounted price from a viatical broker who takes a commission. The ill person gets needed money to help pay expenses and the investor gets the full face value of the policy when the person dies. Brokers also sell a spin-off of viatical settlements--life or senior settlements--in which the investor is offered the life insurance policy of an older, healthy person. The investors are told they are helping older people stay financially solvent in their golden years. The pitch is based on a high rate of return—often 20 to 40 percent—and a humanitarian opportunity to help a sick person, a combination appealing to older investors.

Pitfalls

Viaticals can end up costing investors a lot of money. The North American Securities Administrators Association (NASAA) calls viaticals one of the top ten investment scams. According to Joseph Borg, former president of the North NASAA and director of the Alabama Securities Commission. Securities regulators are “concerned that the inherent risk of viatical investments - gambling on when someone will die - aren't being adequately disclosed, and second, many investors have been outright defrauded by some viatical companies or their sales agents."
A Florida Grand Jury in 2000 found as much as 40-50% of the life insurance policies viaticated by viatical settlement providers may have been procured by fraud. The Securities and Exchange Commission has taken action against one company that allegedly defrauded 30,000 investors of $1 billion.
Here are a few of the ways people can lose money:

• With improved medical care, the ill or older person may live longer than expected. As the new owner of the policy, you have to pay the premiums to keep the policy in force. You tie up your money longer and your profit declines the longer the person lives.

• Sometimes the insured person is not ill at all, so the investor will need to make insurance payments — sometimes for years — or the investment is lost.

• The insured person may have purchased the life insurance through fraud and the insurance company will later refuse to pay the settlement.

• The insurance company or viatical settlement company may go out of business — along with your invested money.

• Some brokers have sold the same policy to multiple investors.

• The insured’s heirs may challenge changes made to the policy.

Protect Yourself

It is important to learn all you can about a viatical before you invest. Failure to research thoroughly the investment could result in financial disaster. Some questions to ask include:

• Is this investment right for you based on your age, financial status and other personal circumstances? If the viator lives longer than expected, your investment dollars will be tied up for a longer period of time than expected, and you will be paying the policy premiums.

• Is the viatical investment considered to be securities in your state? Check with your state securities regulator to see if it should be--and is registered, and if the broker is licensed. In some states, viaticals are regulated as insurance products; in other states they are not regulated at all.

• Who holds the responsibility to pay policy premiums, and for how long? A lapsed policy means that you could lose your entire investment.

• What control, if any, do you retain over your investment?

• What financial information will the provider disclose about its history? If the viatical settlement provider and/or the insurance company goes bankrupt, you could lose or tie up your investment dollars indefinitely.

What You Can Do

To check on any investment offer or salesperson, or to file a complaint, contact your state securities regulator or your state insurance regulator. You can find state securities regulators at:

• State securities regulators and (click “Contact your regulator”) or call 888-OUR-AARP and ask for the phone number of the securities regulator for your state.
• State insurance regulations