The Los Angeles Times - December 9, 1999
Kathy M. Kristof, Times Staff Writer

Answer: A viatical settlement is an insurance policy, usually one owned by a terminally ill individual, that is sold at a discount to the death benefit. The policyholder gets immediate cash, and the investor or investors profit when the policyholder dies.

Q: It sounds gruesome. How did these get started?

A: Viatical settlements emerged in the late 1980s in response to the AIDS crisis, when thousands of people became too sick to work and quickly found themselves destitute.

Many of these people did own a life insurance policy, however, perhaps having obtained it as an employee benefit. And because so many patients were gay men, many did not have dependents who relied on them for financial support. Viatical settlements sprang up as a way to address these patients' need for cash.

Q: Specifically, how do these work?

A: Investors buy life insurance policies from the dying at a discount to the death benefit. The more dire the diagnosis, the more the policyholder can command for his or her insurance policy. At the time of the sale, the policyholder names the investor as the new beneficiary of the policy, or the owner of the policy. All it takes for the policyholder to do either is to notify the insurer.

An AIDS patient who has an estimated six months to live, for example, might sell a policy with a $100,000 death benefit for $90,000 to an investor. The AIDS patient gets immediate cash. And if the patient dies within the expected period or even sooner, the investor would get a generous return.

A diagnosis indicating that a particular patient has longer to live would mean that he or she would have to sell a life insurance policy at a steeper discount to its death benefit. Someone with two years to live, for example, might get only 70 cents on the dollar, or $70,000 for a $100,000 policy.

Some viatical settlement companies will break a single policy into several pieces for sale. In these cases, investing in a pro rata share works much the same way.

Q: I've heard that these investments are safe because they're basically life insurance policies, and life insurance death benefits are backed by state insurance guarantee funds. Is that true?

A: The part about life insurance policies being backed by state guarantee funds is true. But viatical settlements are anything but safe investments. They pose numerous risks to investors. To start with, it is generally impossible to get a cash return on your investment until the policyholder dies--and there's no telling when that might happen, even if your policyholder has a terminal illness. If your policyholder lives longer than expected, your investment return goes down. Some elderly viatical investors complain that their "terminally ill" policyholders could outlive them.

Moreover, viatical companies often put firewalls between investors and policyholders--keeping the identity of the policyholder secret for his or her protection. That makes it hard to know for sure if there really is a policyholder, and it creates an opportunity for fraud.

Because viatical settlements are part insurance, part security, they fall into a sort of regulatory no-man's land. Authorities acknowledge that there is no broad agreement on whether they ought to be policed by state corporations departments or state insurance departments. And in some states, they're not regulated at all.

Q: What's a "senior settlement"? And where did this idea come from?

A: Generally speaking, senior settlements work like viatical settlements except that the policy is on the life of an elderly person who does not have a terminal illness. Consequently, it's much more difficult to know what your investment return might be and when the policy might pay off.

As AIDS became increasingly treatable through medical advances and as the rise in reported cases began to slow in the U.S., the viatical settlement market began to stagnate.

Companies looked around for other potential "viators"--the people who sell their policies--and the pool was expanded to include late-stage cancer patients and other terminally ill individuals.

But that market also proved limited. Who else might be likely to die with more insurance than their families might need? Old people, of course.

Thus we have "senior settlements"--also known as "life settlements"--in which a healthy senior sells his or her policy simply because any potential beneficiaries have grown up, died or no longer need financial support.

With the entry of senior settlements, the viatical industry has roughly doubled during the last 18 months, according to the National Viatical Assn. trade group, going from an estimated $500 million in annual sales then to roughly $1 billion now.

Authorities say the changes and growth in the business are encouraging a variety of fraudulent activities, from seniors lying to obtain policies for resale to unscrupulous brokers fabricating imaginary policies to sell to unwitting investors.
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