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Viaticals not sure thing
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January 16, 2001: 7:23 a.m. ET
Investing in terminal patients' policies can backfire
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NEW YORK (CNNfn) - A consumer publication is warning about the potential dangers of an increasingly popular insurance product.
In its February issue, Consumer Reports tackles the complex subject of viaticals, a term derived from a Latin word meaning provisions for a journey.
Viaticals allow terminally ill insurance holders to get a percentage of their policy for immediate use by selling an interest in a life insurance policy they own and using the cash to help see them through their remaining days.
Investors who become beneficiaries of the policies would receive their share of the claim after the insured, or viator, dies.
Betting on a terminal patient's demise may sound like a sure bet, albeit a morbid thing, but Consumer Reports senior editor Marlys Harris said the potential returns on a viatical are not as certain as they first appear.
"One of the key issues is life expectancy," she said. "Predicting someone's life expectancy is pretty difficult business."
Harris noted that the viatical settlement grew at a time when AIDS was considered a death sentence. Treatment has improved over the years, however, giving new hope to AIDS patients.
"A lot of people who thought [viaticals] were a sure thing have been very disappointed in their returns, which have been nil," she said.
Investment Scam?
Under a viatical settlement, the policyholder sells his or her policy to a settlement company for a fraction of its face value, depending on estimated life expectancy. The purchasing company later solicits investors and after the insurance company pays off, investors receive their share of the claim.
Consumer Reports warned that insufficient consumer protection has left many viators with inadequate payments and investors hurting after promised returns of as much as 30 percent did not pan out.
In addition, fraud has been a problem and the North American Securities Administrators Association named viaticals as one of the top investment scams of 1999. Consumer Reports said 33 of the 73 viatical companies it found operating in 2000 had been in trouble with regulators in the past two years.
The magazine said problems include failing to register with securities or insurance authorities, misuse of investor funds, misstatements about the medical condition of patients and a fraudulent practice called "cleansheeting," where viatical companies solicit patients with life-threatening chronic or terminal conditions to lie about their health and apply for insurance polices, which are then resold to investors.
"There have been so many bad actors who have gotten into it," Harris said. "So many of the companies involved in it have been crooked."
Nevertheless, viaticals seem to be a growing business. Consumer Reports said in 1998, the 40 to 50 small companies that make up the industry exchanged about $1 billion in life insurance policies, up from $50 million in 1991.
Now, the magazine said, the industry is moving to extend the marketing of viaticals to healthy seniors through so-called "life settlements," a market potentially worth $108 billion.
In spite of all the troubles, Consumer Reports said the viatical industry fills a need in helping critically ill people pay for medical care and retired people who did not save enough for their old age.
In her article, Harris tells of a man who sold half of a $500,000 term-life insurance policy, his only asset, and was able to meet medical expenses and clear up debts after the viatical company took its $59,000 share of the proceeds. His daughter maintained the money helped her father live another year.
Consumer Warnings
Consumer Reports has prepared a list of tips for viators and potential investors considering viatical settlements:
- Consider the alternatives. Check for early distributions in your insurance policy and explore borrowing from family and friends and using future proceeds from the insurance policy as collateral.
- Check for companies affiliated with one of the two industry trade groups if a viatical settlement is your only option. The National Viatical Association and the Viatical and Life Settlement Association can verify a company's credentials. Also check with local insurance regulators and get bids from several companies before accepting an offer.
- Consult with a financial advisor before signing over a policy. Collecting a viatical settlement can disqualify a patient from Medicaid benefits. Settlements paid to those with less than two years to live are free of federal taxes.
- Exercise caution before going the viatical route. Due to a lack of regulation, viators have no protected right of privacy and may be subjected to a hefty tax bill.
- Don't accept less than cash value for a whole-life policy.
- Investors should approach viatical settlement investments with great caution, since they are high-risk investments that could take years to pay off.
- Do not use this type of investment for Individual Retirement Accounts. IRA holders must start withdrawing funds no later than April 1 of the calendar year after they turn 70-1/2. If the cash isn't there, they will face a penalty equal to half the sum they were required to withdraw but didn't.
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