Watch Out! Viatical ahead!

If someone waves a viatical contract at you, run for help

Bob thought he was doing a clever thing when he invested $50,000 in a viatical contract. He 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.

Can you say scam?

But the insured person wasn’t really sick at all and Bob ended up paying the policy premiums to avoid losing his investment. Bob became a frequent flier at Payday Loans in order to meet the premium paydays.

What is a Viatical?

A viatical insurance settlement is an agreement in which a third party buys a life insurance policy from an insured person and thus becomes the legal beneficiary of the policy. The insured person receives an immediate cash payout and in most cases the buyer of the policy agrees to continue to pay the premium on the life insurance policy until the death of the insured.

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 a chunk of money to help pay expenses or take a cruise and the investor gets the full face value of the policy when the person dies. Brokers also sell a spin-off of viatical settlements, called life or senior settlements, in which the investor is offered the life insurance policy of an older, healthy person.

Helping others?

The investors are told they are helping older people stay financially secure 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.

Watch out

Viaticals can end up costing investors a lot of money. It is known to be one of the top ten investment scams. 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.”

Action taken

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’s how the investor 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, maybe for years, or the investment is lost.
• There may be some technical problem with the insurance policy or it may be fraudulent 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 the investment could result in financial disaster.