Every now and then, a reader asks us what we think of viaticals as investments. It's a complex issue. Viatical settlements are not without risk, and they may make some people uncomfortable.
Viatical settlements involve a terminally ill person selling his or her life insurance policy to someone else. Imagine John, stricken with a fatal form of cancer. He's 36, single, and is expected to live only three more years. If he needs cash to pay for medical bills or just to spend and enjoy, he might "sell" his life insurance policy to Jane. If it's set to pay $100,000 on his death, Jane might pay $66,000 for it. That way, John gets a lot of cash now, and Jane expects to get the $100,000 in about three years. At that rate, she'd be earning roughly a 15% annual return.
There are many risks, though. John may hang on for seven years, significantly reducing Jane's return. Indeed, a cure for his cancer might be discovered. John may even outlive Jane! It's true that these settlements can provide a service for sick people, but they're not necessarily win-win. The middlemen arranging these settlements take cuts. Also, if John lives, he's without his life insurance policy and few insurers will want to insure him, as he's been so sick recently.
One downside of viaticals is that they're set up to have you rooting for speedy deaths and against medical breakthroughs. Also, there have been many instances of fraud with viaticals. (Some in the viatical industry will want to point out that they've cleaned up their act recently, and that many disadvantages are no more.) Here's more info, from the Federal Trade Commission area, the Securities and Exchange Commission, and viatical-expert.net.
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