Risky investments in death

Viatical contracts: Maryland, others move to curb widespread fraud in life insurance trade.

November 09, 2001

PEOPLE facing terminal illness with limited funds may have a final resource: selling their life insurance policies at a discount for needed cash.

Investors then collect the face amount when the insured dies, at a profit. There can be mutual benefit in these agreements, called viaticals, if they are honestly managed.

But the soaring $1 billion annual market in these contracts is rife with abuse, deception and fraud. Hundreds of millions of dollars have been lost by unwary investors. Officials across the country are cracking down with criminal prosecutions and tougher laws to govern the industry.

Maryland is among the states taking action, alleging a Baltimore viatical firm misled investors to buy fraudulent life policies that resulted in $3 million in investor losses. The company assets are in court receivership.

Regulators in Arizona, Florida, Pennsylvania, Vermont and Colorado have also moved against viatical companies in the past year. Federal authorities launched a multistate investigation last year, seizing insurance firms' records.

"Viatical fraud in the United States today is astronomical," says Joseph Famularo, a U.S. attorney. The North American Securities Administrators Association lists viatical fraud among the top 10 investment scams.

Maryland's lawsuit against Answer Care Inc. aims to define these contracts as investments, making them subject to registration, public disclosure and other laws. Most states already regulate viaticals, primarily as insurance contracts, but their powers are often weak.

One type of consumer deception involves fraudulently obtained life policies that are subsequently canceled, leaving investors holding the bag. Sellers may misrepresent the life expectancy of the insured, delaying returns; some buyers are forced to pay additional policy premiums or lose everything. Some sellers take investor money without even buying up real insurance policies for them.

Despite promises of industry self-reform, abuses keep surfacing. Bankruptcies are not uncommon. It's a risky investment, even a morbid one, that bets on the prompt demise of another person. Death may be a certainty for all, but viaticals are anything but a sure thing.

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