It's important to know the risks of Viatical Life Settlements before putting your money into this type of investment.
Viatical settlements are a type of investment that investors, particularly seniors, are often approached to buy. While viatical investments are legal, they can be risky, and many of the products sold under less-than-honest claims.
Viaticals Defined
Viaticals, which are also sometimes called life settlements or senior settlements, target the life insurance benefits of the terminally ill. Here is how viatical investments work: A patient with AIDS, cancer or other terminal illness sells his or her life insurance policy to a small group for half of the policy's cash benefit. The patient uses the money for medicine or simply to improve his or her quality of life. Investors get a share of the death benefit when the insured later dies, and a fee is paid to the viatical investment broker. Those selling viatical investments typically claim investors will get a return of 20 percent or more.
Betting on Death
However, the rate of return for investors drops the longer the patient lives. Viaticals may seem morbid – the investors are basically waiting for the patient to die. Also, premiums often still must be paid on the insurance policy, or it expires, and the investors get nothing. That means that the premiums end up being paid by – you guessed it – the investors.
In some cases, viatical investments have been sold on life insurance policies of people who were not even ill, but wanted to raise some cash in their later years. And some viatical investment schemes are simply investment scams.
The Ups and Downs of Viaticals
The American Association of Retired Persons, or AARP, provides more details to consider before putting your money in a viatical investment.
Pitfalls AARP lists include:
- The insured person may have purchased the life insurance through fraud and the insurance company will later refuse to pay the settlement.
- The insurance company or viatical settlement company may go out of business — along with your money.
- The insured’s heirs may challenge changes made to the policy.
Still, some investors find viaticals an investment worth considering. For those investors, research is key. The Securities and Exchange Commission says the laws regarding the selling of viatical investments vary from state to state, and recommends investors check with their state insurance commissioners office.
In Canada, laws in most provinces currently prohibit viatical investments.
The Federal Trade Commission also has information for those who are considering selling their life insurance policies. For people who are interested in raising cash by offering their life insurance policies as an investment, viatical-web.org is a nonprofit consumer resource that provides information on viatical investments.
Whether you are considering investing in a viatical or raising cash by selling your life insurance policy, it is wise to consult with a financial advisor that you trust before making a decision.
