Viatical Settlements Investment Fraud
Historically, some insurance companies have offered an accelerated death benefits option which allows the insured an opportunity to receive up to 80% of the death benefit at any time within the last year of their projected life.
The remaining 20% is then paid to the insured's estate.
On the other hand, the business of viatical settlements involves the selling of a policy death benefit, at less than face value, by a terminally ill person to a third party.
This is accomplished, for a commission, with the assistance of a broker who offers the policies to settlement provider companies for bid, with the highest bidder obtaining the policy for resale to investors.
The broker receives a commission based on the sale price.
Size of the Industry
The dollar amount of viaticated policies has skyrocketed in recent years. In 1990, approximately $80 million worth of life insurance was viaticated as compared to an estimated $1 billion in 1999.
Fraud in the unregulated viatical settlement industry has become rampant; as much as 40-50% of the life insurance policies viaticated may have been procured by fraud.
Experts estimate that investors have lost more than $400 million in these types of investments since the industry started in the 1980's.
One corporation alone, charged with 155 felony counts relating to criminal fraud had bad policies with a face value of $12.7 million.
Unscrupulous individuals in the viatical industry procure policies by a practice referred to as "clean sheeting" which is the act of applying for life insurance while intentionally failing to disclose the applicant's status as being terminally ill.
They can get away with it initially because most insurance companies avoid the added costs and invasiveness of medical exams and blood tests by relying on an honor system below a certain policy face value.
Many insurance agents and brokers assist and often encourage viators in committing the fraud because it not only provides more policies than would be available though legitimate means, but it also provides a much higher rate of return due to the fact they can be bought from viators so cheaply.
In a legitimate transaction, the ill person usually receives 50%-70% of the face value of the policy.
However, a "clean sheeted" policy viaticated during the contestable period may offer as little as 10% of the face value because it carries the high risk of rescission, or cancellation by the insurance company, due to fraud.
Wet Ink Policies
After the policy is issued, the insured person will sell his policy, or multiple policies from different insurance companies, sometimes within weeks, to a settlement provider using a broker.
This is referred to as a "wet ink policy" because the ink on the contract is still "wet" when the policy is sold.
The odds against an individual finding out that he is terminally ill within weeks of buying a policy are exceedingly high.
To see that happen repeatedly within a short period of time with the same broker or provider is strong evidence that they are both well aware that the policies have been "clean sheeted" .
To hide the fact that the policy has been viaticated shortly after issuance, con artists will obscure viatication by simply changing the beneficiary to someone at the settlement provider firm.
A second way is to employ a "collateral assignment" which is similar to where the insured seeks a loan from a third party and secures the loan by pledging the death benefits of the policy.
In fraudulent transactions they pledge the death benefits but do not receive a loan.
Finally, some settlement providers merely delay reporting that the policy has been viaticated until the contestability period is over, falsely believing that it is not a crime then.
An indication of culpability is that virtually all parties attempt to hide the viatication of fraudulently obtained policies from the insurance company for as long as possible.
The contestability clause for life insurance lasts for two years after issuance, during which time it may be rescinded by the insurer for fraud in the application.
After this period ends, the insurer is obligated to pay the death benefit, regardless of any fraud in the application.
Because policies viaticated during the contestability period may be rescinded, they bring, as mentioned, a much lower price in the market.
A Case Study
As an investor, you are offered the opportunity to purchase an interest in a life insurance policy in which the insured is terminally ill (i.e., viatical settlement).
You are told:
|that your investment will produce a 100% rate of return because you are assigned a policy with a face value of twice your investment which you can claim upon their death;|
|that you will have the option of reselling your policy once it becomes incontestable (two years after the date the policy is issued) for 70% of the face value;|
|and that if the policy is contested or canceled by the insurer, the promoters will provide a replacement policy through a "replacement policy trust" managed by them.|
They say these are better investments than stocks, mutual funds, annuities, and CD's because viatical investments have the following attributes:
"Full liquidity at maturity from rock solid 'A' rated insurance companies!"
"Tax advantaged & hassle free! 100% fixed rate of return which is fully secured."
"Zero risk to principal, a totally safe investment with no load & no fees!"
"Short holding periods with early buyout options available as well!"
"No speculation, no interest rate risk, no market risk, no economic risk!"
In addition they say you will be making a "humanitarian investment" because the terminally ill person will be able to use the funds to receive improved health care; pay off debts; take a vacation, reduce family stress, and enhance their quality of life.
In exchange for your money you receive a Membership Certificate certifying that you are a member of Viatical Funding LLC.
After deducting the fees paid to sales agents, viator agents, and other intermediaries from your funds, you find that the ill person will actually be left with very little.
In this case only $5,400, which is only 12% of your investment of $45,000, or 6% of the policy's face value of $90,000.
They fail to disclose to you that the insured was terminally ill prior to being insured, that they concealed this fact on the application, and thus subjected the policy to cancellation by the insurer.
Instead of being designated as the sole beneficiary you may find you share it with creditors and family members, and that the option to resell the ownership interests is not a guaranteed option, but rather an "assurance" that they will "make an effort" to facilitate a resale.
In any event, you will not likely receive a promised 70% of the face value but only the amount another investor would be willing to pay, less commissions, which could be much less.
They also fail to mention:
|the risk of the insured living much longer than the estimated life expectancy, thereby greatly reducing the annual yield;|
|the risk of their becoming insolvent and unable to replace a contested or canceled policy;|
|the risk of the life insurance policy lapsing, or that you will often have to pay the policy premiums for the duration of the policyholder's life;|
|the 15% commission the sales agent receives from your investment;|
|who is responsible for monitoring the health status and location of the insured, obtaining a death certificate, and making a claim to the insurance company.|
Life Expectancy of the Insured
To determine their rate of return investors rely on a report which projects the life expectancy of the insured, but there are no minimum requirements as to who may generate these reports or projections.
One company used a nurse and a plastic surgeon but could have used the janitor.
Viatical investing is highly speculative and risky.
Even when the policyholder exists and is terminally ill, there is a high degree of uncertainty in predicting when they will die.
New AIDS drugs and cancer treatments have compounded the risk for investors because they help policyholders live longer.
Viatical settlements are illegal under Canadian insurance legislation so Canadian investors should not be involved in these schemes at all.
Not Enough Sick People
Financial Federated Title & Trust, and Asset Security Corporation pled guilty after being charged with conspiring to recruit insurance agents to defraud more than 3,000 investors while purchasing viaticated insurance policy investments over a three year period.
Another company, American Benefits Services, was ordered to pay $129 million restitution on a corporate guilty plea in this case where the three companies fleeced people with promises of high returns on purchases of life insurance policies from the terminally ill.
Investors were told that their money would be used to purchase a beneficial interest in viaticated insurance policies, and that medical overviews were being performed on the insured persons whose policies were being bought.
Although at least $115 million in investor monies was taken in, the promoters used only $6 million of these funds to buy insurance policies whose total face value was just over $7 million.
They used the balance of the money for purposes totally unrelated to the purchase of viaticated insurance policies, such as the purchase of twenty-five houses in Florida, Vermont, South Carolina, Massachusetts, Georgia, and Toronto, two helicopters, thirty-four luxury automobiles, three motorcycles, several jet skis and boats and a Fort Lauderdale burrito shop.
Viatical Industry Terminology
Refers to a fraudulent criminal act committed by a proposed life insurance applicant, and by life insurance agents who knowingly assist or conspire with the insurance applicants, by failing to disclose a pre-existing medical condition in response to a question on a life insurance application which would affect issuance of the policy.
A person who has a life threatening or terminal illness who sells or assigns their life insurance policy.
The life insurance policy of a terminally ill person, sold or offered for sale, generally at less than face value, through a viatical settlement company.
Policies are generally contestable for two years from the date of issue and are subject to being rescinded by the insurer for cause, such as application fraud and suicide.
Viatical Settlement Provider:
A person who enters into a viatical settlement contract with a viator. Often referred to as a settlement company or funder.
Viatical Settlement Broker:
A person who, for profit, offers or attempts to negotiate a settlement contract between a viator and one or more viatical settlement providers.
Viatical Settlement Sales Agent:
A person other than a licensed viatical settlement provider who arranges for the purchase of a viatical settlement or an interest in a viatical settlement from a viatical settlement provider.
Mortality Profile Report:
A report based on a review of a viator's medical history, which gives a prognosis of a viators life expectancy.
Usually done by a health-care professional and generally at the behest of the viatical settlement provider to calculate the value of a viatical contract.
Viatical Investment Broker:
Defines a person or entity other than a licensed viatical settlement provider who solicits investors to purchase a viatical settlement interest from a viatical settlement provider.
We Chose to Keep Your Money
Personal Choice Opportunities mislead investors when they sold viatical securities in the form of loan transactions.
Investors lent money to PCO in order for them to purchase the benefits of life insurance policies from terminally ill individuals on the promise that they would receive a return on their investment of 21-25% per annum.
The funds, however, were not used to purchase life insurance policies but kept instead.
Over 1100 investors nationwide are believed to have invested $80-100 million in these transactions in just ten months.
No evidence of any valid life insurance policies being purchased has been discovered.
Repercussions for the Viatical Industry
Life insurance premiums are based on actuarial tables which are worthless in fraudulent applications.
Insurance companies cannot afford to pay out large death benefits after collecting small premiums for only a few years.
Even if they don't go bankrupt the added costs are eventually passed on to other policyholders.
The viatical industry as a whole must take steps to better police itself.
If it does not, it risks ceasing to exist as an industry either by being legislated out of existence or by being pushed out of the market after destroying investor confidence in its product.
If this fraud is to be stopped, it will require the total commitment of the insurance industry.
The first step is for the industry to wake up to the existence and scope of the problem.
Currently a person charged with viaticating a fraudulently procured insurance policy worth $100,000 face value, who stands to gain tens of thousands of dollars, faces the same penalty as a shoplifter who takes a pack of cigarettes.
A mere sixty days in jail is an encouragement, not a deterrent which may be why the industry watchdog has never received a single referral from the industry itself reporting such fraud.
Once thriving on those dying from a terminal illness, medical advances, which are helping patients live longer, has caused the business to start targeting new clients - usually seniors with high payoffs - who may be willing to sell their life insurance policy to investors at a discount.
Life settlements, or the sale of a life insurance policy to a third party, are sometimes referred to as "senior settlements" because most of the life insurance policies purchased insure the life of a senior citizen.
The owner of the policy gets cash and the buyer becomes the new owner and/or beneficiary of the life insurance policy, pays all future premiums and collects the entire death benefit when the insured dies.
People decide to sell their life insurance policies for many reasons. Some common ones are the changed needs of dependents, a desire to reduce or eliminate premiums, and a need for additional cash to meet expenses.
State regulation of insurance generally does not extend to life settlements.
Certain aspects of these transactions may fall under the various Securities Acts so there can be financial risks involved when entering into such arrangements.
You should consider contacting a professional tax advisor to find out the tax implications as life settlement proceeds are generally not tax free.
Also know, if you are the seller that you will be required to provide certain medical and personal information to third parties who will be paid the proceeds from your policy upon your death.
These third parties may sell your policy and pass along your medical and personal information to other individuals.
Typically, life settlements are offered to buyers, for resale to investors, at a discount from the death benefit. The discount is for the entire life of the policy, not an annual rate of return.
An annual rate of return cannot be guaranteed. Your rate of return depends on when the insured dies, and no one can predict a person's life expectancy.
Keep in mind that a life settlement is not a liquid investment because the return on such an investment does not occur until the insured dies.
Spreading the Risk
The Alabama Securities Commission issued a Cease and Desist Order against Viatical & Elderly Settlement Providers, LLC (VESPERS) Washington, D.C., to stop conducting business in the state of Alabama after they received information that they were engaged in the illegal offer and sale of investment contracts involving fractionalized viatical settlement contracts there.
VESPERS, though not licensed to sell this type of security in the state, have solicited independent insurance agents to sell interests in viaticals issued by them with promises of low risk and high returns of 28-70 percent on two to five year investments for a 10% commission.
Suit seeks to recover losses from insurance scam
1,000 Ohio investors lose; money laundering, fraud charges are filed
03/19/04 - AP- DAYTON - Victims of an alleged $20 million swindle hope they can recoup some of their losses as a court-appointed receiver tries to straighten out the mess.
"That was my life savings," Barbara McAdory, 61, of suburban Trotwood, said of the $72,000 she invested in policies sold by LifeTime Capital Inc. of nearby Miamisburg.
"Everything's down the drain now," she said.
The LifeTime founder and seven others have been indicted in Pensacola, Fla., on fraud and money laundering charges.
Brad Stockslager, 28, who came to the Dayton area to help his 93-year-old grandmother, said he found that $499,000 of her savings had been invested in portions of 12 life insurance policies.
He said his grandmother must spend $3,000 a month for assisted care, not including medical expenses, and receives only about $1,800 a month.
H. Thomas Moran of Oklahoma City has been appointed receiver in connection with a lawsuit filed in U.S. District Court in Dayton by H. Thayne Davis of Edmond, Okla., who is seeking to recover $613,000 invested in policies held by LifeTime.
Moran is seeking to recover money on behalf of an estimated 4,000 investors, about one-fourth in Ohio.
Among Moran's efforts, he said, will be seeking restitution on behalf of investors in the prosecutions in Florida and tracking assets of those accused of defrauding them. He plans to focus on the $157 million LifeTime portfolio.
Investing in life insurance policies of those near death emerged primarily as a result of the AIDS epidemic.
Terminally ill people sold their life insurance policies to companies such as LifeTime Capital for a percentage of the face value, a deal called a viatical settlement.
The dying got cash to use in their final years, while the investors who buy the policies were told they could receive returns exceeding 60 percent if the dying -- called viators -- died within their projected life expectancies.
The lawsuit said most haven't died because an alleged "sham" company provided false life expectancies of viators.
Gerald Myers of Dayton, a certified public accountant, said he has six clients who bought LifeTime policies, including a couple in their late 70s who have their remaining life savings of $800,000 tied up in the policies.
"He has since gotten Alzheimer's and is in a nursing home under Medicaid," a program for the indigent, Myers said.
Miriam Gates, 64, of Dayton said the $18,000 she and her husband, Rufus, 68, invested in the policies "was the only thing we had. It was like a cushion -- we knew it was there to draw on in hard times."
Lawyer Duffles Loot from Viatical Scammer
LOS ANGELES - 08/06 - (AP) A high-profile celebrity attorney has settled a lawsuit accusing him of siphoning money from a $90 million death futures scam that one of his clients ran.
Attorney Robert L. Shapiro, who has represented O.J. Simpson, Christian Brando and other celebrity clients, reached the settlement Tuesday with attorney Barry A. Fisher, who was assigned to recoup the investors' losses from the scam.
Terms of the settlement, which was reached as jury selection was about to start in the civil case, were confidential. Fisher had been seeking at least $3.5 million.
In 1997, Shapiro represented David W. Laing, the owner of Personal Choice Opportunities Inc. in Palm Springs, which purportedly allowed the terminally ill to sell their insurance policies at less than face value so they could use the money while they were alive.
Personal Choice promised investors in the company 25 percent returns, but authorities said the insurance policies never existed.
Laing pleaded guilty to conspiracy to commit securities and mail fraud and served eight years in federal prison before his release a few months ago.
Fisher, who was appointed by the court to reclaim the investors' money, filed suit in 2001 accusing Shapiro of arranging for up to 12 bags, each filled with $500,000, to be taken from Laing's home in April 1997 so the defendant could post bail.
Fisher claimed in the lawsuit that Shapiro also took at least $200,000 of that money for attorney fees - although he should have known that the money was "illegally and fraudulently obtained."
Shapiro denied any wrongdoing, saying he had acquired the money from the sale of Laing's home and that his payment had been approved by a federal judge.
Fisher said outside court he has recovered much of the $90 million for investors, but about $15 million remains unaccounted for.