investing in life settlements and viaticals

They are if the guy has the good manners to die promptly. If he lives too long, the returns go in the tank. -- Doug

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That depends, of course, on the size of the death benefit relative to the cost of buying the policy and of keeping the policy in force. What piqued my interest was an advertisement in the magazine Smart Money that also appears at

.Here is one example:

83 year-old female: $2,000,000 policy Cash offer: $400,000

The annualized returns for the investor as a function of how long the insured lives, assuming no further premium payments, are

#years ROR

05 38.0% 10 17.5% 15 11.3% 20 8.4%

So this would be an attractive investment, especially as part of a portfolio of similar policies.

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Sorry, you caught me in full smart-a mode. My wife says it is easy to do. I took a light look at viaticals some time ago and decided I wasn't interested. They started getting well known with AIDS patients, who then proceeded to live longer than anyone thought possible. A very good thing for them, tough on the investor.

Which exposes the "ick" factor -- waiting for someone to die to get your money back. I'm not against them; They provide a useful service. But I think I'll invest in other things.

I just ran across this article while using Google to spell check "viatical". It is suggesting more than a little bit of caution when thinking about viaticals.

-- Doug

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Yeah, I'm not sure viaticals even exist in the respectable marketplace anymore. Life settlements (LS) have become the norm. Viaticals refer specifically to insureds that are "terminally ill" and typically have less than 24 months to live. Life settlements, on the other hand, refer to all other institutionally sold life insurance policies. LS targets those who no longer need the coverage but want more than the cash surrender value. Viaticals focus on dying individuals who probably still need the insurance, but unfortunately, need the money more. The policy seller is almost assured to get screwed in a viatical sale.

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The main players in the life settlement industry will only sell policies to institutions, not individuals (to minimize criminal motivations, of course). You would likely need to find one such institution to be able to invest in the industry. Some hedge funds also invest in LS. For the record, I have never heard of the returns being as high as you cite. Most institutions target 10-12% return.

The Smartmoney example is an extreme, if not unheard of, one. The things that make a policy a good settlement candidate do not align with the example.

1. Increasing premiums due to falling dividend crediting rates and the inability to afford premiums as one ages are two key motivators for those looking to sell a policy. "Assuming no further premium payments" is a bad assumption to make.
2. A policy is a good settlement candidate if there is a large variance between the death benefit and cash surrender value. If a M policy has a 0k cash surrender value, there's no "wiggle room" to negotiate the settlement. You need a sizable gap. How does one get that? Well, they either a) have a recently issued policy or b) have severely underfunded the policy. In either case the premium requirements to maintain the policy are significant. Think of it as trying to begin saving for retirement at age 75. It's just too late in the game, to not have a substantial base.
3. The insured needs to have had a marked decline in health since policy issuance. That's how life settlement companies make their money. The insurance company prices a policy based on life expectancy. But once the policy is issued, the insured's life expectancy can change and there is nothing the insurance carrier can do about it. A life settlement company, on the other hand, will re-underwrite the insured and determine an accurate life expectancy. They then profit on the spread between the two (the insurance company expects to collect premiums for X years, but the settlement company expects to pay premiums less than X years). So now we're not only looking for a newly issued policy, but the insured has to have recently declined in health too!

The very long story short is simply that I don't agree with Smartmoney's ad. That's a pie in the sky example that is far from realistic.

(note: institutions buy LS policies in blocks, so the law of averages & large numbers takes care of the statistical outliers that Doug, perhaps jokingly, mentioned).

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I seem to recall that happening about ten years ago. People with AIDs were getting these kind of loans. The idea was that, death was pretty much guaranteed within a few years. Then, advances in medications enabled some of them physically improve, and keep living on and on. Especially since so many of them were relatively young, and may have been in decent health before the AIDS symptoms started.

I wonder if there are investors out there, still waiting.

Yes there are, but I wouldn't be too worried about them. They are still making a hefty profit. Most AIDS victims are very young, so the premium payments are low. Furthermore, most of the terminal patients were in such dire financial straits that they were paid only a fraction of the fair market value of their policies.

The abusers who too advantage of these terminally ill patients are definitely seeing lower returns than expected, but they're probably still making more than the average investor.

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The "abusers" were willing to pay more for the policies than the life insurance companies were (the "cash value"), or the insureds would not have sold their policies to them. Unless you have some evidence of misrepresentation or fraud, I think you are smearing people.

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I'm all for providing secondary markets and liquidity. I also believe that most people "get what they got comin' to 'em". But the viatical industry used outright lies, deception, and fraud to trick both investors and insurance policyholders.

...Like thousands of others around the United States, Tracton invested in a billion-dollar industry rife with fraud and unregulated by the federal government or, until recently, most states. In fact, corruption in the viaticals industry was so widespread in the mid- to late-1990s, federal law enforcement officials formed a task force to combat it. In the last two years alone, federal and state authorities have issued 78 indictments, 57 of which resulted in convictions.

Or from the AARP website:

Even the National Association of Insurance Commissioners warns potnetial policy-sellers: Did I forget to mention that almost all policies, including term (which has no cash value), are now issued with an "accelerated benefit rider" (it's free). The rider allows for up to 50% of the face value to be withdrawn prior to death in the event that the insured is declared terminally ill by a licensed physician. The remaining 50% is paid to the beneficiaries as intended.

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