Viatical Settlements Not the Secure Investment Some Marketers Claim

Gloria Wolk got involved in the AIDS crisis while walking her dog.

Shortly after a neighbor asked if he could join her on her daily strolls, the Laguna Hills-based life insurance agent learned that “this handsome young man” was dying. Wolk, a divorcee with three grown children, began to volunteer at an AIDS help organization, where she met more young men--and a few young women--who were dying too.

Convinced that these sick people were being duped out of what was often their only major asset--a life insurance policy--Wolk wrote her first book, “Cash for the Final Days” (Bialkin Books, 1997). It was a primer on something called viatical settlements, which allow terminally ill people to sell their life insurance policies to investors, who profit by collecting the death benefits.

Viatical settlements can provide financial help to the policyholder when they need it most--and sometimes can provide a good return to the investor--but at the time, Wolk was concerned that investors were taking advantage of policyholders.

Now she’s written another book--but not because she’s worried about the policyholders. She’s concerned about thousands of investors--many of them elderly--who are buying the insurance policies.

Viatical settlements are being marketed to senior citizens as “no-risk” investments, she laments. In letters, fliers and newspaper advertisements, a host of “insurance and investment companies” tout viaticals as high-return, “guaranteed” securities. In fact, they are exceptionally high-risk, illiquid and often inappropriate investments. Her new book, “Viatical Settlements: An Investor’s Guide” (Bialkin Books, 1998), spells out how viatical settlements work as investments and where the pitfalls lie.

Viatical settlements work like this: An insured person who is diagnosed with a terminal illness agrees to sell his or her insurance policy to a private party, who is then named as the policy’s beneficiary. The amount the investor pays for the policy depends on the size of the death benefit and the amount of time the policyholder is expected to live. Generally, those who are expected to die quickly can get a bigger portion of the policy death benefit, while those who are expected to live longer get less.

For instance, somebody with a $100,000 policy and an estimated six months to live might get $90,000 to “viaticate” his or her policy; a similarly situated policyholder who has an expected life span of two years might get $70,000.

Naturally, if the policyholder dies as scheduled (or sooner), the return to the investor can be substantial. The investor who paid $90,000 for a $100,000 policy and gets paid off in six months, for example, would reap $10,000, which translates into an annualized return of 22%.

But increasingly, investors are not getting paid as expected--either as a result of medical breakthroughs or fraud.

Consider 82-year-old Peggy from Colorado, who invested $12,000 to buy a $20,000 policy in 1994 from someone who was expected to die within two years.

“Now it’s going on five years and our broker is talking about maybe [the patient will] live until 2001,” says Victoria, Peggy’s daughter, who asked that their last names not be used while they attempt to get Peggy’s money back. Meanwhile, Peggy’s health is quickly deteriorating. Victoria believes the “viator”--if there really is such a person--will outlive them all.

“If my mother had invested more, there would not be any money to have a home, pay the bills or eat,” she says.

Dick Hausten, a Minnesota-based consultant, has a similar story.

Hausten’s in-laws invested $92,000, buying pieces of four different insurance policies, after being assured that viatical investments were safer than certificates of deposit at a local bank. They were assured high returns and guaranteed payoffs. Years later, they suspected misrepresentation for a simple reason: “People weren’t dying,” says Hausten.

In fact, unlike a CD, not only are viatical settlements not insured, but the investor does not have ready access to his or her money until the contract is paid off because someone dies.

Wolk has two notes of caution for viatical investors. One is that medical advances have prolonged the lives and dramatically improved the health of many AIDS patients. Although you can viaticate a policy if you have virtually any illness, AIDS patients make up the bulk of viators, or people selling their policies for cash.

The second issue requires some explanation.

The identity of policyholders is kept secret. That’s partly to protect viators’ privacy, but it’s also to protect their lives. Early in the evolution of the viatical settlement industry, policyholders began to worry about being harassed--even killed--by angry investors if they didn’t die as quickly as expected. As a result, the names of policyholders are never given to investors. Instead, a middleman--a broker or viatical sales company--steps between the investor and the policyholder and supposedly checks to be sure that the policy is legitimate and the illness as dire as advertised.

Investors get “profiles” of viators--synopses of what ails them and their doctors’ determinations of life expectancy. Sometimes they even get names and phone numbers of doctors, who can look up the viator by case number, to verify that the information given on the viatical settlement is correct.

Viatical settlements are regulated by most state insurance departments, but by and large they’re regulated from the standpoint of the insured person, not the investor who purchased the policy. Consequently, while there are some protections for the person selling his or her policy, there are few protections for the investor.

However, an unscrupulous salesperson could simply make up policyholders, doctors and diagnoses. Or he or she might arrange for terminally ill people to buy policies--and immediately sell them--after they become sick. Either scenario can prove devastating to investors, since insurers don’t pay benefits to phantoms, nor to those who secure policies through fraud.

“Although there is potential for great profit, there are also great risks,” Wolk says. “Investors are sold [viatical investments] with these false claims that this is a safe, high-yielding investment. They are rarely told about the risks.”

Kathy M. Kristof is a syndicated columnist and author of “Kathy Kristof’s Complete Book of Dollars and Sense.” Write to her in care of Personal Finance, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail kathy.kristof@latimes.com.