Are Viaticals a Bad Investment?
Viaticals, or viatical settlements, are transactions in which a person or group purchases someone’s life insurance policy. The seller gets the settlement quickly, while the buyer receives the insurance policy death benefit when the original policyholder dies. Viatical settlements are usually purchased from someone with a terminal illness. (Learn More – What Are Viaticals?) Viatical investments may seem like a beneficial option to some because the investment isn’t affected by the stock or bond market, and it can result in a healthy return on investment. (Learn More – What Are the Potential Benefits of Investing in Viaticals?) There are many risks and fees when investing in viatical settlements. Insurance policies can be complex, and each has their own rules and requirements. One of the largest risks is that the original policyholder will surpass their life expectancy, and the buyer could end up paying premiums and fees that will result in a loss rather than a return. (Learn More -- What Are the Potential Risks of Investing in Viaticals?) Because viatical settlements face little regulation from governing agencies, the industry has been plagued with scams. Some viatical firms sell fraudulent policies, and some sell policies that are unlikely to result in a real return for the investor. (Learn More -- Are There Scams Relating to Viatical Investments?) Viatical settlements present a moral challenge for some. Someone who invests in another person’s life insurance policy may begin to anticipate that individual’s death and fear medical advancements that could save the person’s life. (Learn More -- What Are the Potential Moral Issues Involved in Viatical Investments?)
What Are Viaticals?
A viatical settlement allows for a third party to purchase someone else’s life insurance policy. Generally, they involve a terminally ill individual. The basic idea behind viatical investments is that they allow a terminally ill person to access the money they need while they are alive. The person (or company) who purchases their life insurance will get more than their investment back when the terminally ill person dies and the life insurance settlement is paid out. Here’s an example: Thomas is 45 years old, single, and has just been diagnosed with a terminal type of cancer. His doctors have told him he has two years to live. He has a life insurance policy that will pay out $100,000 when he dies. He sells his life insurance policy to Janet for $60,000. This way, he has $60,000 to pay his medical bills and enjoy the remainder of his life. If there are any additional premiums that need to be paid until his death, Janet is responsible for them. When Thomas dies, Janet will get the life insurance policy’s death benefit. These types of investments may also be called life settlements. Many people define a life settlement as a policy sold by someone with more than 48 months of expected life. An investment in a policy held by someone expected to die before 48 months is referred to as a viatical settlement. While viatical settlements usually involve someone with a serious terminal illness, life settlements are often purchased from seniors as well as ill individuals.
What Are the Potential Benefits of Investing in Viaticals?
Viatical settlements are appealing to some investors for a variety of reasons.
Viatical investments are not tied to the stock or bond market. The return won’t fluctuate based on the economy or a bad week on Wall Street.
An investor in viatical settlements can sometimes make an 8% to 10% return on their initial investment.
If the terminally ill patient dies earlier than expected, fewer premium payments will have been made, which may mean an even larger return than the viatical investor planned.
When purchased in a private mutual fund that invests in life and viatical policies, potential losses may be lower, as risks are diversified with hundreds of different life insurance policies.
Many investors are initially drawn to viatical investments because of marketing from viatical investment firms. These firms often tout these settlements as risk-free and highly profitable. However, the marketing often does not also explain the many risks involved in life settlements and viatical investments.
What Are the Potential Risks of Investing in Viaticals?
Whether purchased individually or through a mutual fund, viatical settlements are a complex area of investment, with many drawbacks and risks.
Investors may have their right to a death benefit challenged. Insurers may go through every detail of a life insurance policy to find any insurance laws that were potentially broken. Depending on the agreement and the policy seller’s actions, they may find something.
The insurance company may go bankrupt or refuse to pay. This is a less likely scenario, as most insurance companies answer to regulating boards that monitor their business practices. However, it is still a risk, especially when dealing with a private viatical purchase, or a smaller or less reputable viatical investment firm.
The policy seller lives for longer than expected. This is perhaps the biggest and most well-known risk of viatical settlements. A policy may be purchased from someone with the expectation that they will live for no more than 48 months. If that person beats the odds and lives for years, the settlement purchaser may lose money on their initial investment as they pay ongoing premiums and the death benefit diminishes.
The policy seller commits suicide or dies in a way that is not covered by their life insurance policies. Many insurance policies have explicit exceptions for a death benefit payout, including if the policyholder commits suicide or dies in a certain manner.
A viatical settlement transaction may have many fees. In addition to premiums, a viatical investor will likely have to pay a hefty broker’s commission and a fee to the life insurance provider. Investors who purchase through a mutual fund or life settlement fund will probably have to pay a management fee as well.
Purchasing plans that are a part of a group policy and owned by an employer or organization are especially risky. The owner may terminate the policy, which would require it to be changed to an individual policy. There may be limitations on transferring the policy, and additional fees may be required.
Although regulating authorities have made headway with cracking down on fraud in the viatical settlement industry and educating consumers, it remains a relatively unregulated area of investment, with many companies and brokers looking to profit off unknowing consumers. Viatical settlements don’t classify as a “security” and therefore aren’t regulated by many state and federal agencies. In some states, anyone can sell or broker viatical settlements. In others, one only has to be an insurance agent to sell them.
Are There Scams Relating to Viatical Investments?
The viatical investment market faces more regulation today than in previous decades, but instances of fraud and unsavory business practices are still something to look out for. Some common scams involving viaticals include:
A viatical “firm” that doesn’t purchase life insurance policies, but instead gathers money from investors then dissolves, taking investors’ money with them.
Firms that sell “senior settlements” that they themselves have purchased, often from healthy seniors who may live for many years.
A firm that sells “term” insurance policies rather than life insurance policies. If the policyholder outlives the term of their insurance, the buyer of the policy will get nothing.
Firms that recruit sick people to buy easy-to-obtain insurance policies, often with a lower return, that don’t require a medical exam. If the original policyholder dies within two years, the insurer will likely (and successfully) refuse the claim on the grounds of fraud.
What Are the Potential Moral Issues Involved in Viatical Investments?
Some individuals may struggle with the morality of viatical settlements. Viatical investors will likely find themselves anticipating someone else’s death for financial gain. Investors in viatical settlements may also begin to fear and root against medical breakthroughs that could help them get better. For example, viatical settlements rose to popularity during the height of the AIDS epidemic. Some viatical industry players point to the fact that brokers fought for the largest payout possible for their AIDS clients at the time, and the settlements allowed for a better quality of life and medical treatment for some AIDS sufferers. But many viatical investors were worried about the breakthroughs in AIDS treatment. Many were disappointed when their investments ended up “failing,” as HIV-positive individuals began to live far beyond their life expectancy at the onset of the disease, when the policies were sold.
Viatical Settlements. (May 2004). U.S. Securities and Exchange Commission.
The Morbid Niche of Life Settlement Funds. (October 2017). U.S. News & World Report.
Life-insurance Settlements Rise from Viaticals Decline. (May 2017). The North Bay Business Journal.
Buying Viatical Settlements. State of Idaho. Department of Insurance.
Money Matters – Viaticals: Not So Humanitarian. (2008). AARP.
Betting on Death in the Life Settlement Market – What’s at Stake for Seniors? (April 2009). North American Securities Administration (NASAA).
Warning: Viatical Settlement. (October 2017). Bob Carlson’s Retirement Watch.
The Gay Men Who Have Lived for Years With Someone Waiting on Their Death. (October 2018). The Atlantic.
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