Maybe some readers have heard radio ads, TV or newspaper ads or been approached by “insurance” people trying to sell investments in the area of viaticals or life settlements. A viatical or life settlement is the purchase or sale of a life insurance policy to a third party for a value in excess of the policy’s cash surrender value, but less than its face value, or death benefit.
The concept behind these investments is that an investor can profit by buying the insurance policy and obtaining the death benefit of an elderly person who is selling their insurance policy. Elderly people, needing money, can sell their life insurance policy to a promoter of these types of investments. A promoter will pay a cash payment to the elderly person and relieve the owner of the policy (the insured) of having to pay premiums sometimes increasing premiums as they get older. These promoters then sell fractional interests in these life insurance policies to investors. The promoters package such policies into bundles and then put them into so called “trusts.”
Investors should be careful when considering whether to invest in these policies for a number of reasons. This is the first of a three part article designed to point out some of the dangers and risks in investing in this type of product.
- How do I determine whether the policy is contrived, or created just for resale? For example, did the elderly person already have the life insurance or did the promoter go to older people and convince them to buy insurance so it can be resold to investors? If the latter, the investors are possibly paying dearly for a middleman, the promoter and engaging in a questionable insurance practice. These promoters are making a substantial amount of money either as commissions for putting the deal together or the difference between the money they raise and what is to be used to purchase and maintain the policy of insurance. This may be an arbitrary and excessive amount of money.
- Who makes the money on the investment? The economics on these investments may not justify the investment because the investor is betting against the insurance company. This is like gambling but you are betting against the house. The investor is betting on a short life of the insured and the insurance company is betting on the insured living longer. The Insurance Company is the house. They are going to price the policy in such a way that is favorable to them. They have actuaries, experience, data, and the systems to figure out the price point that will be profitable to them, and therefore expensive to investors. Investors and even the promoters of such investments do not have access to all the same tools and data that the insurance company has. Generally the longer a policy is held the more valuable it is. It may not be evident whether a policy is developed from a contrived arrangement, as described above or not. Determining whether the policy was bought from an existing long standing individual can be important and can be instructional because it illustrates how policies can be manipulated and how any promoter of a fractional investment of a life insurance policy can create something and sell it for a profit. The fact of the matter is that through my experience helping people deal with these investments, we have found that the promoter makes the money on the front end by selling the product not necessary in the end game, by the policy maturing and paying off at death.
- How do I find out the true or fair market value of the investment? It is to the salesman’s advantage to portray a life insurance policy as having more value than it actually has. What I have seen is salesmen over emphasizing its value. They can “spin” a policy as being more valuable than it is by using life expectancy charts and by mentioning the health issues of the insured to their advantage. This marketing and sales “spin” creates the impression that payoff on the death of the insured will be quicker than reality. Most investors buy into this, thinking they will reap their profit on the death of an insured in due course but fail to realistically factor in the downside.
We are investigating life settlement cases and cases that might involve Brian McGuane, David L. Kagel and others in the sale, and administration of life settlements or viaticals especially when working out of companies named Oxford Financial Group policies, Omni Advisor Group, Inc., and, OFG Trust, OMI Trust, SI 100 (SI-100) Trust, etc. We also can be of assistance with anyone having problems with viaticals or life settlement policies generally. If you have lost money in scenarios similar to the above or any investment of this sort, please give us a call at the Murrin Law Firm. Our phone number is 562-342-3011 and ask for J. Owen Murrin. (This article, and the other two articles are the writer’s personal opinion in handling these kind of cases, and may not be representative of another’s view or reality)