Secrets to successful viatical settlement
You can't beat death.
But if you're careful, experts say, you can invest
in the Grim Reaper's crop and harvest a profit.
The investment, called a viatical settlement, is straightforward:
Someone with a terminal disease, such as AIDS or cancer, sells his
life insurance policy for less than face value. The buyer then cashes
in the full amount at the original owner's death. The longer the
life expectancy, the cheaper you can buy the policy.
Buyers know the amount they'll bank, but the rate
of return remains a wild card because it's impossible to apply group
statistics to individual cases and determine when someone will die.
That alone stamps this alternative investment vehicle
"high risk." In the last few years, articles in Consumer
Reports and 20/20 broadcasts stressed this rate of return black
hole, scaring potential investors.
To compound the issue, laws vary by state, giving
viatical settlement sales a Wild West reputation. Con artists rushed
to fill any gaps in the evolving regulations, making sensational
headlines when they landed in court.
Yet even regulators like Deborah Bortner, director
of securities in Washington State and president of North American
Securities Administrators Association, say viaticals can be a legitimate
product when packaged right.
Packaged right is the key.
"Don't be afraid to say, 'This is a great idea
but I don't think this is a great company,'" says Stacy J.
Braverman, chief legislative and compliance officer for institutionally
funded Viaticus in Chicago.
Gambling on death
A co-worker at the New Hampshire Association for the Blind introduced
Evanell Trow to the viatical settlement concept. In 10 years, this
friend had earned nearly $500,000 from an initial $100,000 stake.
So when an insurance agent offered Trow a viatical
settlement investment in July 1997, she and her husband sold stock
in a limited property investment to get the $10,000 ante. She purchased
a policy from an AIDS patient with an 18-month life expectancy.
By October, the Trows had spent another $20,000 on two additional
Standard viatical tables indicated they could expect
a rate of return between 12 and 28 percent.
"But it's been almost five years and they're
still alive thanks to new medications," Trow says.
Her rate of return has dwindled to 4 percent. And
because these patients outlived the premium funds in escrow, Trow
has paid $400 out of pocket to keep the insurance policies from
"I didn't get into this to pay for someone's
illness," she sighs. "I just want to get out with my principal."
Her story drives home the message that viatical settlements
aren't for everyone, says consumer advocate Gloria Grening Wolk,
author of Viatical
Settlements: An Investor's Guide.
"The right people getting involved in this industry
will make money, but they will not make the astronomical returns
that have been promised in order to lure people who don't look past
what they're told," she says.
"Right" people in this case shakes
- Those who can tolerate losses in their financial
- Investors who realize viatical settlements aren't
liquid like stocks and mutual funds
- Seniors who have adequate additional products in
their IRA funds to cover the mandatory 70 1/2 disbursement rule
- People who refuse to risk any more than 50 percent
of their portfolio in viaticals
- Investors with at least $10,000 who can wait a
minimum three years for their policy to pay off
- Sophisticated researchers willing to pay for outside
council to review each step before they sign.
It boils down to attitude. "If the stock market
goes belly up, the average investor understands he has no recourse,"
says William Scott Page, president and CEO of Page & Associates
in Fort Lauderdale, Fla., and past president of the National Viatical
Association. "But let someone live one year longer than anticipated
on a viatical settlement, and investors are screaming bloody murder."
To start, work with brokers who represent the buyer only. This immediately
cuts risk for conflict of interest issues, says Phil Leech, sales
and marketing manager at Grand Rapids, Mich.-based Trade Partners.
Next, decide which disease you'd feel comfortable
investing in. And let your agent know in advance you'll consider
only policies from A+ rated insurance companies like Northwestern
Mutual or John Hancock.
Avoid policies less than two years old. These fall
into a contestable period when insurance companies may refuse to
pay up on death. Plus, scams rifling through this industry often
involve newer policies taken out specifically to defraud viatical
"Individual investors should buy into well-diversified
pools as opposed to one person buying one policy," suggests
Purchase only via an escrow, where a bank or other
third-party bonded agent holds your funds until the I's are dotted
and the policy arrives.
Then insist that the transaction is turned over to
a trust, especially when you are a pool member. Under this set-up,
the trust can sign for the policy payoff and disperse the money
quickly as opposed to making the group wait while the insurance
company tracks every member to sign off.
Viatical settlement providers often obtain more than
one life expectancy review in their purchasing process. Braverman
asks to see them all.
"You don't want to be in a position where the
firm bought the policy on a very long life expectancy projection
to pay less for it, then sold it to you at higher rates, citing
a short life expectancy," she notes.
Ask what happens if the owner outlives this projected
life expectancy and depletes the premium set-aside, urges Page.
In the past year, Lloyd's of London launched contingency
insurance coverage for viatical settlements that meet certain criteria
-- a front-loaded add-on sold at 5 percent of the policy's face
value. This stop-loss option states if the owner survives 24 months
beyond the anticipated maturity date, Lloyds pays the investor.
The timing is too recent to offer claims history, so your decision
hinges solely on your risk tolerance, according to Page.
Examine the paperwork you receive. No matter how official
a certificate's appearance or wording, you need a document signed
by the insurance company official naming you the irrevocable beneficiary.
If the policy is assigned to a trust, you should receive
this official paperwork from that corner as well.
A matter of trust
Investors commonly purchase viatical settlements through someone
they trust: a nephew, neighbor, an ex-student. Investigate them
anyhow, says Wolk. Her Web site, Viatical-Expert,
maintains a "hot seat" listing of firms and brokers who
run afoul of authorities for anything from inadvertent failure to
register to criminal convictions. Wolk also offers a list of licensed
firms by state.
"Scratch any company not authorized to do business
in two of four states: California, New York, Washington and Florida,"
Always phone both your state's insurance and securities
commissions to probe for problems as well.
Next, call the underwriting insurer to verify a real
policy exists behind the number on your paperwork.
Then compare the contract in hand to other companies'
wording. After all, this industry is registered, not regulated,
so contracts aren't set in stone, Wolk warns.
"If you find another contract with sections providing
better buyer protection, ask your firm to add those paragraphs,"
she says. "And of course it has to be signed by a principle
of the company to be effective. Anything the sales agent tells you
In that vein, check out the medical reviewers who
dictate the life expectancy.
Call the physician's state medical board to check
his practicing status and specialty. You don't want a retired family
practitioner making decisions on rare cancers.
Finally, drill your broker on its tracking methods.
The shorter the life expectancy, the more frequently it should check
the patient's physical condition -- and location.
According to Braverman, these check-ups are crucial
to ensure policies are put on cost-saving premium-waiver status
when the patient reaches a disabled state -- and to avoid a policy
lapse should that disabled state upgrade to premium-paying health
standards in the future.
Don't accept drivel about privacy laws barring access
to these details, says Page. The only information investors can't
expect is the patient's name, address and Social Security number.
"Educated investors will save this industry,"
Wolk says. "Because even in the best of situations, if the
investor isn't prepared to handle this market, it's still going
to be a failure for them."
Julie Sturgeon is a freelance writer
based in Indiana.
-- Posted: July 17, 2001