Investing in Someone Else's Demise

Extremely low interest rates have sent investors in search of creative ways to generate income. A client recently was approached by a salesman offering life settlements, sometimes known as viaticals. The client wanted our opinion on the products, which is where an investor buys life insurance policies from the elderly or from people who have terminal illnesses. The cash payout gives immediate money to the insured, and the investor collects the policy payout when the person dies. The purchase is at a discount based on the death benefit, expected lifespan and other policy considerations.

I will start by saying that viatical settlements can benefit an insured individual in desperate need of money, and like other aggressive financial tools, they have their place. They must be used very carefully, on the advice from a trusted financial professional, and only when other better options have run out. They must only be used if it’s in the best interest of the insured. From an investor point of view however, purchasing viatical products amounts to betting on a persons’ life. Such activity carries with it certain ethical and financial risks. If the insured person dies quickly the profits could be high. Each day they live, the rate of investment return goes down. If they live too long the person or entity purchasing the policy may actually lose money if they are having to pay high premiums to keep the policy in force. I once had a client with terminal cancer survive for nine years after being given six months by his doctor. A viatical purchase on his life would have been disastrous for an investor.

Therefore, the offer of guaranteed high rates of return is a red flag, since the actual return will not be known until a person dies. No salesman can guarantee when that will happen. What makes me feel especially uncomfortable about these arrangements is that the investor, now the beneficiary, has a financial interest in the insured dying sooner rather than later. It sounds harsh, which is why these products can be controversial. It may also be the reason the State of Utah Insurance division once issued a warning about life settlements stating bluntly, “There is a substantial interest in not having the life of the insured person continue.” Yikes!!

Viatical settlements can be legal instruments but they cross enough grey areas that many financial firms, including my own, will not deal in them. The moral conflicts and potential risks, along with the often-unscrupulous players involved, has encouraged us to leave these types of products to the major insurance companies. They have the financial strength and expertise to assess the risks, along with the regulatory oversight to insure they follow legal and ethical standards. I recommend individual investors recognize that these products are often pushed by salesmen seeking a hefty commission, but they carry risks and other challenges regular investors might want to avoid.