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Investing in life settlements and viaticals
If you are approached about investing in transactions called life settlements or viaticals, don't let the promise of easy money cloud your judgment. Life settlements and viaticals are generally not suitable as investments for individuals, and someone trying to pitch these to you as smart investments could be looking to take you for a ride.
Life settlements and viaticals are complex transactions in which a life insurance policyholder sells his policy for a lump sum of cash and, in exchange, the investor assumes future premium payments and then collects the death benefit when the insured dies.
In some states these arrangements are regulated as securities and an investor must be a qualified institional buyer; even in states where life settlements and viaticals are regulated by the insurance department, reputable investors tend to be large financial organizations.
It's not a safe playground for an individual investor, especially if you're unfamiliar with the marketplace.
Unsuitable for the individual investor
An "investment advisor" who approaches you with a "great opportunity" in the life settlement market will not likely disclose or may misrepresent the extensive downsides to these risks. According to the National Association of Insurance Commissioners, here are a few of the potential pitfalls:
- Life settlements and viaticals are not liquid investments. You cannot "cash out" if you change your mind.
- There is no investment return until the insured dies and the insurance company pays the death benefit.
- There is no guaranteed rate of return because there is no guaranteed life expectancy for the insured, who may live longer than the life expectancy estimated by the settlement provider.
- If the insured lives longer than expected, you could be responsible for paying the premiums on his policy, which will decrease your rate of return.
- In addition, you may be required to pay fees or commissions.
- If the insured dies within the two-year contestability clause on the policy, the insurance company can refuse to pay the death benefit if it believes the insured lied on his application or if he commited suicide.
- If the insurance company that issued the policy goes out of business, the investor may not be able to collect the full death benefit.
Certain types of life insurance can make for particularly bad investments. For example, a group life insurance policy could be terminated by the employer. Or if the insured owns a term life policy, he could outlive his term and the policy would never pay out.
Who makes a suitable investor? Take AIG, which funds life settlement transactions. AIG, which provides insurance, financial services and retirement planning, reported net income of $11.49 billion in the first three quarters of 2007; it can afford to take some hits in the life settlement market and knows how to spread its risk. You, on the other hand, in your living room with a glossy brochure about life settlement investing, have better investment options elsewhere.