Buying This Insurance Can Leave You Poorer
By: Source: AARP Bulletin Today Date Posted: 2003-09-03 13:25:00-04:00
At 71, Jim Tracton was seeking a safe, solid investment to cushion his retirement years. His stocks, bonds and annuities were drawing only a modest return.
After consulting with an insurance salesman and doing some research, Tracton sold much of his holdings and sunk $175,000 into viaticals, a little-known investment vehicle that promised big profits with low risk. It was a guaranteed money-maker, Tracton, a retired psychotherapist and lawyer in North Miami, was told. What could be better?
Just about anything, it turns out. He lost his entire investment in a phony viaticals deal brokered by company executives who would later be convicted of fraud.
"It was an elaborate fraud motivated by greed," Tracton says.
In a typical viatical transaction, a terminally ill person expected to die usually within two years and in need of cash, sells his or her life insurance policy for less than its face value. The buyer/investor agrees to pay the future premiums and collects the policy's full benefit when it matures—that is, when the seller dies. The earlier the seller dies, the larger the return on the investment.
In Tracton's case, the lure of the investment was in the promised rate of return—from 20 to 40 percent—and in the opportunity to help a sick person who needed money in his last days of life.
When you get to be 71—I'd been retired for nine years—you don't take chances with your money anymore," he says. "I was not getting a lot of interest anywhere else, maybe 5 percent, so the question was, 'Will this last me to 103 when I expect to go?' "
It took Tracton less than two years to learn he had been defrauded in a viaticals scam. His money, which he believed would grow and support his golden years, was now gone.
Like thousands of others around the United States, Tracton invested in a billion-dollar industry rife with fraud and unregulated by the federal government or, until recently, most states. In fact, corruption in the viaticals industry was so widespread in the mid-to late-1990s, federal law enforcement officials formed a task force to combat it. In the last two years alone, federal and state authorities have issued 78 indictments, 57 of which resulted in convictions.
U.S. Postal Inspector Greg Beriault, head of the task force, estimates that victims have lost "hundreds of millions of dollars" investing in fraudulent viatical settlements. Older people "seem to be the biggest victims," he adds. "They've taken money out of IRAs or they've cashed in CDs (certificates of deposit) and they've converted to these investments and they've lost their life savings."
INDUSTRY'S 'BAD ACTORS'
The industry contends many firms are doing legitimate business in viaticals and that investing in them can pay off handsomely.
Doug Head, executive director of the Viatical and Life Settlement Association of America, Orlando, Fla., blames "bad actors" for the tainted reputation of the industry. He points out that his association of 30 member companies has worked with authorities to weed out dishonest companies.
Oscar Gelpi, assistant state prosecutor in Florida, where much of the corruption has centered, says it is an industry like no other.
"Every industry has its bad eggs, but I don't know of an industry like this where a majority of transactions were fraudulent," he says.
In a report published in April by state securities regulators, viaticals were deemed one of the top 10 investment scams in the country.
Fraud is not the only way to lose in a viaticals investment, however. Financial planners say investing in even a legitimate deal is risky. Though the profit can be considerable, so can the loss.
For example, if the seller of a policy lives longer than expected—an increasing possibility as medical breakthroughs extend lives—the investor may have to keep paying premiums much longer than anticipated just to keep the policy in force. Moreover, the profitability of the investment markedly declines with each year the seller lives past his or her projected time of death.
And if an investor is older, the seller of the policy could outlive him or her. [See What are the Risks?]
BROKEN PROMISES
And then there's the fraud. Authorities say an overwhelming majority of investors—such as Jim Tracton—have lost all or part of their life savings due to misrepresentation by viatical salespeople and brokers who guaranteed them hefty profits with little or no risk.
Other investors say they were led to believe their initial investment was all they had to put up. Then they got letters from the viatical company telling them to pay annual premiums to continue the policy or they would lose their investment.
That's how Ann Edwards, who retired from teaching at age 64, lost $10,000. Two years after she put her money into viaticals, the viatical company instructed her to pay an $800 annual premium or lose her investment. The next year it demanded $1,800.
"I consulted lawyers who told me the written (viatical) agreement reads both ways," she says. Further, the small law firm she hired in her home state of Missouri refused to take on the viatical company for fear it would be too costly.
"My savings are gone," says Edwards, who is single. "I have been in touch with many people in the same boat."
UNLICENSED AGENTS
Other investors have lost money after the policies were cancelled because the agent who sold them the viaticals was not licensed.
Some were duped after the life insurance or viatical company discovered the policies were fraudulently obtained—when, for example, a seller lies about his medical history on his application for life insurance. A life insurance company can rescind a policy within two years of the purchase if fraud is uncovered, making it worthless.
Last year a Florida grand jury report concluded that corruption in the viaticals industry was "rampant"—infiltrating about half of all transactions in the state—and recommended that state lawmakers strengthen recent legislation.
In other states, regulation of viaticals varies. According to the National Association of Insurance Commissioners, 32 states regulate them as insurance, two states regulate them as securities, eight states regulate the investment side of the transaction as a security, and 33 states allow securities regulators to analyze the investment side.
Due to the police activity and new regulations clamping down on viatical companies, industry experts and law enforcement authorities agree that viatical investments are in decline. Many firms have declared bankruptcy, some have closed down and reopened under a new name in a different state with lax regulations, and some have stopped selling viaticals altogether in favor of promoting other kinds of financial instruments.
ELDERS MOST AT RISK
Kathy Gammon, an FBI agent and a member of the task force headed by Beriault, says most of the fraud cases she has worked on involved older people who are persuaded that buying into viaticals is a "humanitarian" gesture and great investment opportunity.
"They're told that buying this policy now gives [sellers] money to help them live. But the more they think about it," she says, "they think it's morbid, because they realize they're waiting on this person to die ... for this policy to mature. These investors rarely know who they're investing in. They're usually kept in the dark."
Gloria Wolk, a financial planner and insurance agent turned consumer advocate, advises older people to stay away from this kind of investment.
Adrienne Oleck of AARP's consumer protection unit agrees. "Viaticals are not an investment for the typical consumer looking for a place to roll over their IRA or safely invest their money. Why invest in something so risky and so complicated when there are much safer investments available?"
Jim Tracton wishes he had heeded that advice. Now 74, he was forced out of retirement by the loss of his funds in viaticals.
"I own an apartment building, and now I have to do the roofing, plumbing, the electrical work" instead of hiring contractors, he says.
"This isn't something I'm going to forget," he says with a sigh, embittered by the ordeal. "But I won't let it eat me up."
preview