Viaticals shouldn't be overlooked, some say

Sep 13, 2004 @ 12:01 am

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 As-sociation 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 opp-ortunity 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 in-vestors being paid from new in-vest-ors' money. The plaintiffs also all-eged that the firm misled them by underestimating the life ex-pectancies 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.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Sep 26

Webcast

Investing 2017: Industry at a Crossroads

The advice industry is at a unique inflection point, as the way clients are investing has changed dramatically: Technology has evolved, access to innovative products has changed, and the active vs. passive debate continues to rage on. Advisers... Learn more

Featured video

INTV

How litigation has changed the 401(k) market

Deputy Editor Bob Hordt discusses the lasting impact that a flood of lawsuits brought against major companies and their 401(k) plans has had for people serving the retirement market.

Video Spotlight

Are Your Clients Prepared For Market Downturns?

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

Jerry Schlichter's fee lawsuits have left an indelible mark on the 401(k) industry

After a decade of litigation, fees are lower and retirement plans are more transparent. But have the lawsuits gone too far?

10 best financial adviser jokes

How many financial advisers does it take to screw in a lightbulb?

With margins crashing, broker-dealers look to merge: report

Increased regulation is straining profit margins among broker-dealers, sending many of them into the arms of their bigger brethren.

Hackers may have profited from SEC breach

The hack of the agency's Edgar filing system occurred in 2016, but the regulator didn't conclude until last month that the cybercriminals may have used their bounty to make illicit trades.

Top 10 financial firms ranked by investor satisfaction

Find out which firm took the top slot for overall investor satisfaction for the second year in a row.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print