NEW YORK (CNNfn) - Aimee Swenby was skeptical and a little squeamish.
A salesman called out of the blue one day and said she could get a great return on her investment with almost no risk. Just one catch: she doesn't get the money until somebody dies.
"He told me I'd put in $61,000 and get back $75,000," said Swenby, 35, an office assistant in Chicago.
Sound like a scam? A little ghoulish perhaps?
Swenby thought so until she did some research into what's called the "viatical" business -- the sale of life insurance policies of the dying. Swenby made $14,000, or 22.9 percent, in nine months.
The advantage for policy holders is to get a chunk of cash before they die. They can pay off bills, travel, or simply get their affairs in order. The money is tax-free if they have less than two years to live.
The investor buys the policy for up to 85 percent of its full value, pays the premiums and collects when the person dies. Some investors, like Swenby, also take comfort that they are helping improve a dying person's quality of life.
Let the buyer beware
But viatical investing isn't a sure thing, experts warn. Advertisements can be misleading if they promise "guaranteed" returns. And what if the person miraculously doesn't die?
"People think it's similar to a CD, but it's not," said Barbara Raasch, a partner at Ernst & Young who heads the investment advisory services. "The message for investors is to make sure they just don't believe the ads."
William Kelley, executive director of the Viatical Association, a Washington, D.C. trade organization, said the group hopes to publish guidelines in April for companies and brokers who sell policies to investors.
"You have to ask yourself: 'What does guaranteed mean?'" Kelley said. Some ads offer returns of up to 40 percent, he said.
The tax implications for the investor are also complicated, experts say. Some brokers and companies claim the investments are tax-free when they aren't. There may be capital gains taxes, for example.
Raasch urged investors to get an accountant's help to determine the answer.
"Don't assume the investment is tax-free," Raasch said. "It's a relatively new product."
How the industry began
Viatical settlements started in the early 1990s mainly with AIDS patients, Kelley said. In Swenby's case, the policy holder died of AIDS in early 1996. She and her husband aren't big investors, although they have retirement plans and some mutual funds.
"This was a different sort of investment," Swenby said. "I was a little apprehensive, because your return is based on somebody's death. But you're providing them with money they wouldn't ordinarily have."
For "Richard," a 36-year-old HIV-positive man in San Francisco, viatical settlements of about $40,000 helped him pay off debt and buy a townhouse in 1997. ("Richard" asked that his real name not be used.)
"It's given me a sense of stability," Richard said about the settlements made with Kelco Inc., a Lexington, Ky. viatical company.
Richard was saddled with debt after his lover died in 1995. He sold five policies valued at about $50,000 each. He received 8 to 13 percent of the full value. The percentage was lower because the policies were newer.
"It gave me a fresh start," Richard said. His T-cell count is 250 (people with full-blown AIDS have a level of 200 or lower) and he hasn't reacted well to medication. But he's planning to enjoy the time he has left.
To the skeptics who question whether viatical investing is gruesome, Richard is matter-of-fact and upbeat.
"These people are trying to make money, but they're also helping make someone's life comfortable," Richard said. "Why is that such a bad thing? You're helping someone in dire straits."
The business is expanding
But the industry has become much more mainstream in recent years, said Gary Chodes, president and co-founder of Viaticus Inc., a subsidiary of CNA Financial Corp. (CNA) in Chicago. Companies like Viaticus -- that rely on institutional capital instead of small investors -- have helped change the landscape, he said.
"This is becoming more of a mainstream financial tool," Chodes said. "It's a dramatically different market than the narrow niche when it started."
Viaticus buys policies of cancer and heart patients, Chodes said. The company also buys policies of senior citizens, the affluent, and small business owners, he said.
"We can help a man in his 60s even if he's healthy," Chodes said.
For example, a senior citizen might want to sell a policy to pay for elderly housing. A wealthy person, who has a policy to cover death taxes (a common estate-planning tool) could decide he no longer needs it. Or, a business owner might no longer need a life insurance policy on an employee.
In those cases, sellers would pay capital gains taxes, Chodes said.
A big future
Viaticus expects to buy $150 million to $250 million in insurance policies in 1998, or about double from the previous year, he said.
Kelley said there aren't statistics to show the size of the viatical industry. It's not clear whether individual investors or companies account for most of the industry, he said. All viatical companies are closely held.
But many in the industry see huge potential. Steve Keller, chief executive and founder of Kelco, pointed out that AIDS cases represent only one percent of the market. Cancer patients represent 62 percent, he said. Kelco buys policies using institutional capital as well as money from small investors.
Americans allow life insurance policies worth $2.5 billion a year to expire -- money that they deserve to enjoy, he said.
"Americans are of the mind that you buy a life insurance policy and you don't get any benefit from it until you die," Keller said. "We're of the mind you can benefit from it while you're alive. We put the 'life' back into life insurance."
-- by staff writer Martine Costello