Since 2008, many individuals have been looking for investments outside of bonds or the stock market that provide guaranteed payments at higher rates of return. Some have turned to investing in precious metals, while others have looked to investing in life insurance policies. Many are familiar with the word “viaticals” that became well known during the 1980’s, when people began purchasing life insurance policies on the lives of people with chronic or terminal illnesses, such as AIDS. With viaticals, the insured usually had a limited life expectancy and the owner of the viatical would be paid by the insurance company when the insured died in an amount that was more than the cash surrender value of the policy, but less than the net death benefit. Much has been written in the past about the distasteful business of buying these types of policies as well as the well-known Mutual Benefits bankruptcy case that arose from that industry.
Investments in viaticals have been replaced in recent years with somewhat analogous investments in “life settlements”, i.e., the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit. The insured is usually 65 or older, but is not terminally or chronically ill. The value and cost of the life settlement is based on the insured’s life expectancy. Some buyers and sellers in this industry are licensed and operating legitimately, while others, particularly those that “guarantee” payment within a short period of time, are not. Some recent large bankruptcy filings in Florida and Texas have exposed businesses which were, in reality, fraudulent schemes to lure investors into purportedly guaranteed investments in life settlements.
While life settlements may appear to some as legitimate investment opportunities, which they may be, it is important to gather and understand information integral to that potential investment, including: (1) know what you’re buying; (2) know the background and bona fides of both the insured and the seller from whom you’re buying the policy; (3) know whether the seller is licensed in their state to sell life settlements; (4) know how, and on what basis, the seller determined the selling price for the underlying policy, and review the source documents, particularly the life expectancy reports on the insureds; (5) know how, when and from what source you will be paid on your investment; (6) know what additional payments and/or premiums you may be obligated to make; and (7), most importantly, spend substantial time researching and verifying the bona fides of those with whom you are dealing. In the recent Florida and Texas bankruptcy cases, there were “smoking guns” before the frauds were exposed that, had investors sought the information discussed here before investing, may well have brought the schemes to light much earlier and saved investors hundreds of millions of dollars that may never be recovered.