You may have been approached to buy a "viatical" supposedly a safe investment with a high return.
"Profits guaranteed!" "Your principal safe," the Web sites scream.
But viaticals are a dangerous business today. Cheating is rife. Your potential returns are often stated deceptively. Several states have indicted viatical salespeople for fraud.
It's hard for amateurs to tell the plausible investments from the stinkers which makes it risky for amateurs to go anywhere near them.
With a viatical transaction, you invest in a stranger's life insurance policy. That stranger sells his or her policy, for cash. You buy it, or a fraction of it, at something less than the value of the death benefit.
Your payment is divided three ways: some goes to the person insured, some goes to the broker, and the rest goes into a fund for paying the policy's premiums. When the insured person dies, the death benefit or the fraction you bought is paid to you. Your profit is the difference between what you paid and the death benefit you collect.
Your projected return is based on the person's life expectancy. If the person dies earlier, you get a higher annualized return. If the person lives past his or her predicted life expectancy, you'll have progressively lower returns. You might even be asked to put up more money, to keep the policy in force.
People sell their insurance policies in order to raise cash. Sometimes they're terminally ill and want money for treatment or personal expenses. Sometimes they don't need the policy any more, and can sell it for more than they'd get if they redeemed it for its cash value.
Viatical transactions sound grisly. But they can be fair, if the terms are disclosed and everyone is honestly paid. But sometimes the sellers and brokers are part of a scheme known as "cleansheeting."
Cleansheeters pretend to be healthy, although they're really terminally ill. They buy life insurance based on a fraudulent medical statement. Then they sell the policy to investors, through a viatical broker. Both the cleansheeters and the brokers take large fees.
If the insurance company discovers the fraud within the first two years, it can cancel the coverage. If the person dies within that time, it can refuse to pay.
In either case, you, the investor, would get back the policy premiums you paid but nothing else.
The viatical broker might claim that it will replace any policy that an insurer rejects. But that makes no financial sense. Besides, how do you know that the broker will still be around when the disaster breaks?
If the insured person lives for more than two years before the fraud is discovered, the insurance company generally has to pay the death benefit. But the company can make you fight for it in court, Gloria Grening Wolk of Laguna Hills, an authority on viaticals, told my associate, Dori Perrucci.
Even if you buy from someone not engaged in cleansheeting, you have no idea whether the price you paid for the policy was fair. You'll overpay if the person is in better health than you thought.
When I check viatical Web sites, I find that the potential investment returns are generally not disclosed in an honest way. For example, you might be told that a policy pays a "fixed 42 percent." But that's not 42 percent a year, as you might infer.
Instead, that's your total dollar gain, from the time you buy until the time the insured person dies. If death occurs in three years, you'd have an annual return of 12.4 percent. If the person lived for 10 years, you'd have 3.6 percent.
You don't find many viatical companies explaining that. Any profit, by the way, is taxed as ordinary income, not a capital gain.
In the past few months, several states have moved against questionable viatical companies. Federal investigators have raided some firms, seizing records for investigation. Texas recently secured the first criminal convictions for viatical fraud.
Wolk's book, "Viatical Settlements: An Investor's Guide" is a must-read for people considering an investment ($31.95, through her Web site, www.viatical-network.com. Her chapter unmasking the sales pitches is worth the price all by itself.)
Viaticals appeal to people looking for high fixed returns. But they're likely to break your heart.
Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.
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