'Viatical' life insurance deals require scrutiny


NEW YORK -- Here's a rising investment, pitched to investors seeking "safe and high" returns: "viatical" life insurance deals. The word comes from viaticum, the communion given to Christians who are dying or in danger of death.

The investment itself looks interesting, for well-to-do investors who can afford to tie up some money for one or two years. But there's some fraud out there and you can lose every time you put up.

Viatical deals are struck with people who are terminally ill. Mostly, that means people with full-blown AIDS or end-stage cancer patients.

To raise money for treatment and other bills, they sell part or all of their individual or group life insurance policies -- generally for 60 cents to 80 cents on the dollar.

Increasingly, these policies are being bought by institutions such as banks and life insurance companies. They hold them until the seller dies and then collect the policy's face value.

But a network of brokers is also pitching viaticals to individual investors. Typically, you join a group that buys a particular policy; the viatical company does the paperwork; when the person who sold the policy dies, you get a pro rata share of the payoff. To the living, this may sound too macabre to consider. To many who are dying, however, it's cash in their pockets when they need it most.

Your exact return on the investment can't be predicted in advance.

If a group of investors pays $80,000 for a $100,000 policy and the person dies in a year, they earn 25 percent. If the person lives two years, the return is 12.5 percent. The industry puts the average annual return at 15 percent to 20 percent, although I can't verify that. (Of the $80,000 you pay, by the way, the sick person may get $65,000. The remaining $15,000 goes for sales commissions and fees.)

What makes this investment so safe, the brokers say, is that the patient will die and you will collect. The policies are generally from insurers rated A or better, so the risk is small that the insurer will fail before your policy pays off.

But brokers have an incentive to puff. They earn big commissions for selling this product, usually 5 percent to 6 percent of the policy's face value. So they may ignore the following risks:

* Treatment. There's no current cure for acquired immune deficiency syndrome, but someone could get into an experimental drug program and live a lot longer than expected. That lowers an investor's return and requires a longer wait for your money.

* Fraud. Some companies take your money and run. In Boca Raton, Fla., a firm called United Benefits sold $3.5 million to $4.5 million worth of policies that didn't exist, according to Charles V. Senatore of the Securities and Exchange Commission's Miami office. The SEC recently shut it down.

Another bankrupt firm, C'est Lestial Waters in Mesa, Ariz., allegedly sold more than $7 million worth of unregistered high-interest bonds -- mostly to elderly investors in Western Pennsylvania. It claimed that they were fully backed by viatical settlements, but the Pennsylvania Securities Commission says it has found only around $600,000 in collateral so far. Both the state and the SEC have brought fraud actions against the firm, its directors and nine salespeople (most of them insurance agents).

The attorney for one agent, Michael Gibson of GK Financial Strategies in Wexford, Pa., says Mr. Gibson thought the bonds were sound. So you can't be sure that your agent or broker knows as much as he should about the investment.

* Overpromising. Mutual Benefits in Fort Lauderdale, Fla., (not related to Mutual Benefit Life Insurance Co.) has offered "guaranteed" three-year returns of 42 percent. But no one can guarantee that investors will get that sort of annual yield. Mutual Benefits declined to discuss its business by phone.

* Ownership. The policy you buy may not be put into your name. The owner becomes the viatical company, which names a trust company as beneficiary. To get paid, you have to depend on both.

If the viatical company can change the beneficiary, you're at more risk than you thought.

The SEC recently won a preliminary injunction against Life Partners of Waco, Texas, the largest viatical company in the country. A judge concluded that Life Partners is illegally selling unregistered securities -- in part because of the way the insurance is owned.

Life Partners' president, Brian Pardo, says he will appeal. He now designates the investor as the policy's owner, but the SEC thinks that's not enough. Among other things, it is pressing Pardo to disclose more clearly that he previously was involved in a separate SEC action for fraud.

You can write to Jane Bryant Quinn at: Newsweek, 444 Madison Ave., 18th floor, New York, N.Y. 10022.

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