Viatical Settlements – Buy At Your Own Risk

This Wall Street Journal article from last week reminds me of the advice we hear about things that sound too good to be true.  Viatical settlements or “life settlements” are arrangements in which investors (or intermediary companies) purchase existing life insurance policies from people who they think (hope?) will die within the next few years.  The investors then continue to pay the premiums on the policies until the original policy owner dies (at that point, the investor gets to collect the life insurance pay out).

Life Partners – a company that purchases the policies and then resells them to investors – advertises that its policies are “priced to target a compounded return of 12-14% at life expectancy.”  But it looks like they have been underestimating (by a wide margin) the life expectancies of the insureds whose policies they purchase.  If the insured lives longer than the company has predicted, the investors’ returns start to drop off.  And it looks like the vast majority of the policies purchased by the company over the last several years are still in force, even though many of them were expected to “mature” (ie, the original policy owner was expected to die) by now.

Last year, Fred Joseph, the Colorado Securities Commissioner, testified at a Senate hearing that viatical settlements present “… significant risk to policy holders and investors.”  And Colorado securities regulators have tussled in court with Life Partners, alleging that the company doesn’t disclose to investors how accurate their life expectancy predictions are, or the fact that if future premiums aren’t paid, the policies can lapse (although that aspect of insurance is relatively common knowledge, in a life settlement scenario it’s possible that investors might not understand that they have additional financial responsibility beyond the purchase price of the policy).

Viatical settlements do provide both an investment opportunity as well as a way for insureds to cash in on a portion of the face value of their life insurance policy before they die.  But they are not a get rich quick scheme.  In addition to the moral questions some might have about betting on a stranger’s somewhat rapid demise, there’s also a risk that the insured might live far longer than the projected estimate, and the premiums that the investor must continue to pay will slowly eat away at the anticipated return on the investment.

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