by Michael Taylor
I’m a big fan of niche financial markets as well as learning about how NOT to invest. This leads me this week to the “life settlements” industry, and a subset of that business known as “viaticals.”
Living owners of life insurance policies sometimes seek to sell their policies on the secondary market to receive a lump sum of money as well as to relieve themselves of the obligation to keep up expensive life insurance premiums. Life settlement investors pay that lump sum, maintain the policy premiums, and then collect the death benefit when the original policy owner dies.
The purchasers of secondary life insurance policies, investment funds seeking an above-market return, usually take over policies of elderly or terminally-ill patients who no longer can afford, or who no longer wish to afford, the life insurance premiums on the policy. For the investor, ideally, the insured person dies quickly, before the premium costs eat up returns.
While regulated and considered legal transactions in 42 states, there’s an obvious ick-factor to life settlements, as investors essentially bet on, and benefit from, the early death of policy sellers. The faster the death, the greater the profits. Which when you think about it, you know, ugh. A life insurance policy for someone who beats the odds and lives a long time will end up costing investor the money, who pays too much in premiums, for too long, to ever make a profit.
Viaticals, a subset of life settlements, refers specifically to investing in policies of terminally ill patients, with less than two years to live, or the chronically ill, unable to perform two “activities of daily living” like eating or dressing oneself. For the policy purchaser, you can see how a life insurance policy of a terminally ill person on death’s door is worth a lot more than the life insurance policy of a healthy person.
The legitimate financial cases for buying a secondary life insurance policy are twofold. First, terminally-ill or elderly folks may need access to their cash today for end-of-life care. The industry first grew up as a response to the crisis of terminally-ill and relatively young men with AIDS in the late 1980s. They needed money right away and worried less about heirs or estate-planning. READ MORE: http://www.bankers-anonymous.com/blog/how-not-to-invest-viaticals/
Michael Taylor is a columnist for the San Antonio (TX) Express-News, a former Goldman Sachs bond salesman and writes the Bankers-Anonymous.com finance blog ( http://www.bankers-anonymous.com/ ). Email: firstname.lastname@example.org or on Twitter: @BankerAnonymous