“Pssst! – Wanna buy a life insurance policy
on someone who hasn’t got long to live?” Sounds
a bit of a macabre offer but this is precisely what a number
of companies in the traded life policy business have been
offering for several years.
The role of ‘viaticals’
It may seem to be a little distasteful to buy an investment
which produces a return only upon the death of a stranger.
But when you think about it the transaction can benefit all
parties. Firstly, a person who is terminally ill may have
a large life policy that pays out only upon his death. In
many cases, if the policy could be sold, even for half its
value, it would give the insured person money to pay for a
holiday or better medical treatment etc. during his lifetime.
The buyer of the policy will benefit if the insured dies within
a short time as he stands to make a potentially high return
very quickly. The market makers also make money from the transactions
as do people all the way down the chain in the selling process.
No wonder then that this concept, known as viaticals, from
a Latin word meaning ‘provisions for a long journey’
rapidly developed into a billion dollar industry. Its growth
also came at a time when traditional investments such as stock
markets were floundering. Although the life policies were
exclusively of US citizens they were actively marketed around
the world, including in Bali.
So what could go wrong and did go wrong?
As I said, there is nothing wrong with a concept that can
benefit all parties. Unfortunately, as with all great concepts
ranging from the internet to timeshare, someone will find
a way to abuse the system or ruin it for others by greed and
cheating. In the case of viaticals all manner of alleged abuses
are emerging and will probably result in years of litigation
and prosecutions in the US. The alleged abuses range from
the laundering of drug money and false life projections certified
by doctors to cheating by individuals who did not declare
their conditions to insurance companies and then sold their
policies before the companies became aware of their conditions.
The largest player in the business, the Mutual Benefits Corporation,
is currently in receivership.
How can investors avoid getting caught out?
The fact is, it is not all that easy. Groups such as our own
and life companies administering portfolio bonds carry out
due diligence on funds before accepting them and offering
them to investors. But if something fraudulent is going on
behind the scenes there is not a lot we can do about it. What
we can do however, is advise people to spread the risk. Some
risk taking is necessary if we are to make any headway in
the world and our industry has a responsibility to help people
make real returns, but risk must be taken on in a measured
way. Few people would be rash enough to put all their money
into one fund, but when there is a prospect of staggering
returns people are sometimes tempted. I recall one poor pensioner
in the US relating on CNN how she had lost all her life savings
by investing in technology stocks prior to the crash in 2000.
That may seem a crazy thing to do, yet many people put all
their life savings into other single assets such as a business
– I have seen many cases in Bali – without realizing
that if the business fails for any reason they have no other
source of income.
High returns mean high risk
This is the general rule. Those investing in property right
now may think differently but many people have had their fingers
burned in the past in this field too as they will again. This
applies to every asset. There is no secret formula for making
a lot of money without risk. Although some like the excitement
of risk-taking for most people it is far better to aim for
modest returns and the way to achieve these without excessive
risk is not to put all eggs in one basket. Coming back to
life insurance, the subject of viaticals discussed in this
article should not have any impact on your own life insurance
policies. These are as essential to have as ever. If you have
people who depend on you and you do not have cover make sure
this is put right before you have a condition that will preclude
cover or make it too costly. Premiums also rise steeply with
age so get covered while you are young. Living in Bali may
make you feel younger than you are but the insurance companies
won’t buy that!
Colin Bloodworth is a senior adviser with Financial Partners
International. The views expressed are his own. No investment
decisions should be taken without proper advice. If you have
any questions you may contact the writer at 021 520 8099 or
colin.bloodworth@financial-partners.biz
