- The Washington Times - Thursday, August 23, 2001

The ability to profit from someone's death has been hurt by fraud and longer life expectancies.

Viatical settlements, when executed properly, can be financially beneficial to both investors and dying individuals.

The deals became popular in the late 1980s, at the height of the AIDS epidemic. The settlements allow an investor to buy a life insurance policy at a discount from the death benefit of someone with a short life expectancy. The policyholder receives quick cash, and the policy's new owner collects the benefits after death.

But in recent years the industry has slowed as life-prolonging drugs for AIDS patients hit the market. Con artists have flooded the industry with fraudulent deals that steal from both investors and policyholders.

In some fraud cases, investors gave money to insurance agents who kept the funds rather than reinvesting it in policies. In other instances, policyholders claimed shorter life expectancies on documents than they had been told.

The most highly publicized viatical fraud cases are in Florida, California and Texas. Locally, the waters are relatively calm.

Maryland, which has been active in pursuing viatical fraud, has three investigations open. One lawsuit has been filed against a Baltimore company, Answer Care Inc., for embezzling more than $3 million from investors between December 1997 and June 2000.

"We are concerned about viaticals because typically they are not registered and there's often problems of oversight," said Lucy Cardwell, assistant attorney general with the Maryland Securities Division. "Now it's much more in the open, so people realize it's a problem."

The District is investigating an insurance agent, while Virginia is not looking into any cases. Four companies are licensed to provide viaticals in the state; one of them recently quit the market.

Morris Heins, a principal at American Life Enhancement, a broker company in Indiana, said viaticals are a good deal for both investors and policyholders, but that fraud has hurt the industry's reputation.

"You can't live long enough to read about the hundreds and millions of people who have lost buying viatical investments," he said. "Some people put up $100,000 thinking they were going to be buying shares of a policy when actually they sent the check to someone who was gone … and the people or company didn't even exist."

"That's a large bucket of worms," he added.

At American Life Enhancement, a potential client goes through a thorough screening process, including providing full access to medical records and obtaining a doctor's estimate on the patient's life expectancy.

"If you're a terminally ill individual, you have to have a letter from [a doctor] stating something like 'To the best of my knowledge and understanding, I believe this person is probably going to die in less than 24 months," Mr. Heins said.

Once a deal is struck, a viatical firm buys the policy and gives the client money. Brokers like American Life Enhancement receive referral fees from the viatical companies.

Viaticals work as follows: The sooner the patient dies, the higher the profits. If a client lives beyond his estimated life expectancy, viatical investors may see smaller profits, sometimes even paying the premiums at a loss.

Policyholders typically receive 40 percent to 85 percent of the value of their policies, and investors' returns vary from 12 percent to 35 percent.

For instance, a group of viatical investors may pay a person $80,000 for his $100,000 life insurance policy. At death, the investors make a $20,000 profit.

It is difficult to tell if fraud has increased or decreased, said Lester Dunlap, chairman of the National Association of Insurance Commissioners' Viatical Settlement Working Group, which drafts models of regulations to govern viatical settlements.

"There's no way to tell if it's an increase or just exposing what has existed from day one, that day not being too long ago," said Mr. Dunlap, an assistant commissioner at the Louisiana Insurance Department.

About 50 companies are in the industry, observers say, although numbers are difficult to estimate because the sector is not regulated nationally. About half the states track viaticals, Mr. Dunlap said.

The industry has evolved in recent years as it begins to focus on policies of the elderly instead of the terminally ill.

In 1996, about 80 percent of the market involved policies of terminally ill people, and the rest represented the elderly. Now only 20 percent of the industry caters to the terminally ill, and the overwhelming majority are "life settlements," which focus on the elderly.

The creation of more effective AIDS drugs played a big role in the change.

"That was a blow to the industry, in the sense that people were not buying policies, but it's certainly a wonderful thing for the terminally ill individuals who were otherwise slated to die they weren't dying," said Doug Head, executive director of the Viatical and Life Settlement Association.

Now the focus of companies that serve as brokers between insurance companies and people looking to sell their policies is on life settlements.

For regulatory purposes, a life settlement is considered the same as a viatical involving a terminally ill person.

The returns on life settlements are lower than viaticals, but they are safer investments.

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