Viaticals shouldn't be overlooked as investments, some say

Investment News, Sept 13, 2004 v8 i34 p36

They may be suitable investments for wealthy individuals who can wait.

Full Text: COPYRIGHT 2004 Crain Communications, Inc.

By Gary S. Mogel

NEW YORK - Scandals involving mutual funds and corporate governance haven't stopped people from investing in - or advisers from recommending - funds and stocks. In light of that, some in the viatical-settlement field are asking why its own bad apples should be perceived as bruising the whole barrel.

Doug Head, executive director of the Viatical and Life Settlement Association of America in Orlando, Fla., noted that most viatical investing is done by institutions, particularly German banks and German retirement plans. However, he noted, there is also room for wealthy individual investors.

Affluent individuals who don't mind the lack of liquidity and can wait for the eventual payout can use viatical investments as a non-correlated asset class. Viaticals are unrelated to the price movements of stocks, bonds and many other assets that make up the core holdings of a typical portfolio.

Viatical settlements started as a way for people with AIDS and other serious illnesses to exchange their life insurance policies for immediate funds to be used for medical costs or to enjoy their final months or years. The policies are sold to investors - typically on a pooled basis - for a percentage of the death benefit, based on the number of years the individual is expected to live.

Recently, elderly people have been selling policies to viatical companies for sums higher than the cash surrender value. They then use the proceeds to buy a long-term-care policy or an annuity. Some have donated the money to charity to get a needed tax deduction.

A wealthy investor who wants to get into viaticals usually invests about $50,000, Mr. Head said. "It is generally a single-digit percentage of their portfolio.''

Spread out risk

He noted that annual returns are normally 6% to 10% for long-term viatical investments - those generally of six years or more.

Mr. Head suggests that advisers should counsel clients to spread the risk by investing in a company that buys many policies, rather than invest on their own in one single policy.

Even the viatical industry's most prominent gadfly, consumer advocate and author Gloria Grening Wolk, thinks that viatical settlements serve a purpose for the elderly or terminally ill people who sell their policies for much-needed cash. She thinks they offer a legitimate investing opportunity to those who go in with both eyes open.

"Viaticals are for high-net-worth investors who already have a well-diversified portfolio and are looking to put a small portion into something speculative,'' noted Ms. Wolk, who lives in Laguna Hills, Calif. So instead of placing 10% of their assets in a hedge fund, for instance, they might opt for viaticals, she said.

Shorter-term viatical investments - in which the individual who sells the policy is expected to die soon and which yield high-double-digit returns - should not be recommended by investment advisers, observers said. They noted that the bulk of the unsavory practices have occurred in such investments, which they deem too speculative.

Take, for example, the continuing troubles of Mutual Benefits Corp., a Fort Lauderdale-based viatical-settlement firm that the Securities and Exchange Commission and Florida insurance regulators shut down in May.

Lawsuit pending

About 29,000 investors gave the firm $1 billion to invest in viatical settlements, after being promised returns of up to 72% a year. A fraud suit against it is pending in federal district court in Miami.

The investors, who in August sued to recover a portion of their investments from escrow accounts, accused Mutual Benefits of running a Ponzi scheme, with original investors being paid from new investors' money. The plaintiffs also alleged that the firm misled them by underestimating the life expectancies of the individuals whose lives were insured by the policies.

One of the problems with viaticals is that until recently, states didn't regulate them, though many are now passing or considering such laws because of the well-publicized abuses.

Viatical brokers, financing firms and other service providers are listed on the website of Mr. Head's organization. Advisers must keep in mind that as the industry is lightly regulated, they should scrutinize all companies before doing business with them, observers said.

journal abstracts

Viatical settlements: effects on terminally ill patients

The Viatical Settlement Industry: They Bet on Your Life

Congress takes closer look at overhauling insurance regs

Life settlement training? Basic and homegrown.