Few Investors Can Live With Profiting From a Stranger’s Death
Question: Four years ago, my father’s financial advisor sold him two viaticals--life insurance policies on terminally ill people--for about $20,000. My father was 84 at the time, and the life expectancy of the two people was supposed to be two years. Apparently, they’re still alive, and the investment has yet to pay off.
My objective in writing to you is twofold. Please warn people that this is not the most sound, practical or ethical way to make money. We are distressed that we need to keep checking to see whether someone has passed away to get Dad his funds.
Secondly, is there a way to determine that this is a valid investment--that the case numbers we are checking on are real people?
Every time we call, we hear they are “in declining health.” We feel frustrated with the whole concept.
Answer: A lot of people, including securities regulators, have reservations about investing in viatical settlements.
Viatical settlements allow the terminally ill to a receive a lump sum that represents a portion of the face value of their life insurance. In return, the investor who provides the lump-sum settlement is named as the policy’s beneficiary, so when the terminally ill person dies the proceeds go to the investor.
The investor might put up $70,000 and receive the proceeds of a $100,000 policy, for example. This can represent a tidy return if the terminally ill person dies within a couple of years--or a very poor return if the person lives for a decade or more.
Some people find the whole business ghoulish because investors essentially are profiting by someone’s death.
Others point out that viatical settlements can be a godsend for the terminally ill, but warn that this is area of investing that is fraught with fraud and misrepresentation.
For example, these are not “low risk,” “safe” or “guaranteed” investments, although they’re often sold that way to unsuspecting seniors.
The Securities and Exchange Commission has warned that viatical settlements can be risky investments, while the North American Securities Administrators Assn. says viaticals are unpredictable and not guaranteed.
As you’ve discovered, it can be difficult to determine whether the people whose life expectancy you’re monitoring even exist.
Even legitimate operations aren’t going to tell you the names and addresses of their terminally ill clients, lest you be tempted to hurry their demise.
What’s more, regulation of viaticals in many states is spotty, at best. Some regulators can’t decide whether viaticals are an insurance product or a security, which means it can be tough to figure out who handles complaints, let alone to get any agency to act.
California recently passed a law that made viaticals a security and restricted to whom they could be marketed. Viatical investments must be approved by the state before they can be sold to the average investor.
So if you’re in California, you can direct your complaints to the state’s Department of Corporations (the number is in your local phone book).
In other states, you’ll probably have to check with both securities and insurance regulators to see whether they’ve had other complaints about the company.
You also might consider lodging a complaint against your father’s advisor, who should have thought twice, at least, about selling such a risky investment to an 84-year-old man.
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Enrolled Agents Can Handle Most Returns
Q: I have just moved to the area and am getting my statements, forms and receipts together to have my taxes prepared. In the past, I have used a certified public accountant for my tax preparation and have been happy with my tax refunds.
However, I have been receiving a lot of mailings and letters from enrolled agents, and I’m not familiar with them. What are the advantages and disadvantages to using an enrolled agent as opposed to a CPA?
A: Unless you have a very complicated return, you may be just as happy with an enrolled agent--and you’ll probably pay less for his or her services.
Enrolled agents are tax specialists who are authorized to represent taxpayers in audits and other Internal Revenue Service matters. (In fact, only enrolled agents, CPAs and attorneys are authorized to represent taxpayers before the IRS.)
Many enrolled agents, in fact, are former IRS employees. All enrolled agents have met experience and education requirements designed to keep them abreast of changes in tax law.
CPAs, of course, face even more rigorous testing and education requirements, but not all CPAs specialize in tax preparation. Those who do tend to charge more for a return than enrolled agents.
That could be money well spent if you have your own corporation, for example, or are dealing with complex investments, or simply like the idea of having a high-powered pro do your return.
But you may be paying more than you need to if you have a relatively straightforward tax situation.
Before you hire any tax professional, check their background and credentials and make sure they’re used to handling returns like yours. To find an enrolled agent, go to www.naea.org or call (800) 424-4339. To find a California CPA, go to www.calcpa.org.
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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at money talk@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times’ Web site at www.latimes.com/moneytalk.
