Investments in human 'death futures' spark debate

October 10, 1994|By JANE BRYANT QUINN

NEW YORK -- Should a civilized society allow investments in human "death futures"? And if so, should they be regulated?

These macabre questions are being increasingly debated, as the so-called "viatical" industry expands.

Viatical settlements are available to the terminally ill who happen to own individual or group life insurance policies. The word comes from viaticum, the communion given to Christians who are dying or in danger of death.

AIDS and cancer patients use these settlements the most. They sell their insurance policies through a viatical company, generally for 50 cents to 80 cents on the dollar. A $100,000 policy, for example, might garner cancer patients $60,000. The shorter the life expectancy, the more money patients can expect to get. In general, investors prefer people who probably have less than a year to live, although some viatical companies take people with life expectancies as long as five years.

The viatical company may buy the policy itself and pay the premiums. Or it may find an investor, or group of investors, willing to purchase the policy. When the policyholder dies, the investors collect the proceeds. The return on investment depends on how long the sick person lives.

Speedy deaths might produce an annualized yield of 80 percent; slower deaths have been delivering 15 percent to 20 percent payoffs.

The viatical company itself may profit two ways. Typically, it takes part of the purchase price the investor pays. Some companies may also take a percentage of the insurance proceeds.

To the sick, who have probably lost their jobs, their health insurance and their savings, a viatical payment can be an enormous relief.

"The only thing a person selling a policy has to worry about is how much money he or she is getting," New York City financial planner Patti Drivanos, of Bandfield & Drivanos, told my associate, Amy Eskind.

But this is a largely unregulated industry, with enormous potential for abuse.

Among the problems:

* 1. Disclosure.

Viatical companies may not disclose that the payment may deprive the patient of Medicaid or other government benefits reserved for low-income people. Or that they owe taxes on the income that exceeds the premiums paid and dividends received. Or that they may have up to 30 days to change their minds.

(In the two states requiring a 30-day look, some salespeople have buyers waive that right, says Carol Hagler, speaking for the National Viatical Association (NVA) -- not an admirable approach. Other companies honor the right fully.)

* 2. Price.

Investors might take advantage of a dying patient, by offering less money than the policy is worth.

The National Association of Insurance Commissioners recently adopted a model regulation on viaticals. If passed by the states, it would encourage a minimum payment of 50 percent of the policy's face value for someone believed to have two years or more to live. Payments scale up to 80 percent for patients expected to die within six months. But even those minimums are low. Drivanos says that, for two years or less to go, most companies are paying at least 60 percent of face value.

The NVA in Waco, Texas (800-741-9465), offers a free list of its 20 members who buy or broker policies.

Anyone looking for a settlement should call them all, complete their paperwork and get competitive price quotes.

* 3. Reliability.

Dangers for consumers haunt any unregulated industry. Florida shut down the Credit Life Corp. in May after it acquired insurance policies and then failed to pay. Credit Life is in 'N bankruptcy; its former president couldn't be reached. NVA members chipped in to pay the former policyholders the prices Credit Life had promised.

Only six states -- California, Indiana, Kansas, New Mexico, New York and Vermont -- have laws governing viaticals. Florida turned down a proposed law, after heavy lobbying by the industry.

The Securities and Exchange Commission says that the viaticals arranged by Life Partners Inc. are actually unregistered securities, and brought a complaint against the company and its president, Brian Pardo. Pardo argues that viaticals are a simple sale of property, and hence not under SEC jurisdiction.

The SEC further complained that Pardo failed to tell investors that, after a previous run-in with the SEC, he was enjoined from violating the anti-fraud provisions of the federal securities laws. Pardo says that's not relevant to his viatical business.

Viaticals may not be a patient's best choice. More than 215 life-insurance companies offer accelerated benefits to qualified policyholders. They pay anywhere from 25 percent to nearly 100 percent of a policy's face value six months to a year in advance of the expected date of death. Depending on the situation, accelerated benefits may provide the patient more money than he'd get through a viatical company.

Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y., 10022.

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