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 Overview
Let's say that you are diagnosed
with a terminal illness, such as serious cancer or AIDS, but you
don't have sufficient money for treatment or even to keep yourself
comfortable until you die. But let's say that you do have a life
insurance policy, although in such a case you'll find that it does
you pitiful little good until you do cash it in. So, you find
somebody who will buy your insurance policy now at some reduced
value, knowing that very shortly they will be able to cash it in.
This gives you the money for treatments to hopefully slow the
progress of your disease and also maybe keep you somewhat
comfortable until you finally kick the bucket.
From the investors' perspective, they have examined your medical
records and prognosis and know with some certainty (depending on
what you have, and how bad it is) that you are going to die within a
couple of years. When you die, the investors know that your life
insurance policy will now pay them as the named beneficiaries, so
they will get the money that they paid you for the policy plus some.
It is then just a simple matter of taking their total profit on the
policy, and dividing it by how many years you actually live, and
that is their return on their investment.
So, let's say that you have a $300,000 life insurance policy, your
oncologist tells you that at best you have two years to live, and so
the investors pay you $200,000 for it and you name them the
beneficiaries of the policy. If in fact you die in two years, the
investors will have made a profit of $100,000 split over two years,
or what amounts to a $50,000 per year return - although this will be
a pre-tax profit and income taxes will be owed on it. Still, not bad
for a $200,000 investment.
This type of investment in the life insurance owned by a person who
is probably soon going to die (with "soon" being somewhat
arbitrarily set as being within three years) is known as a "viatical
settlement". In the 1980s, there was created almost overnight a
multi-billion industry in investing in the life insurance policies
of AIDS patients, and later this industry spread to cover terminal
cancer patients and in fact nearly any other disease where sure
death was a soon-to-be-realized certainty.
The fly in the ointment for investors is of course that you might
outlive your physician's prognosis, meaning that when the Angel of
Death came for you at the appointed time you told him to take a hike
and don't come back until much later. This danger, from the
investors' view, arises primarily from advances in medical
technology. What might have been sure death a couple of years ago,
might become defeatable or at least put into long term remission.
Such was the case with many of the AIDS patients. As medical
technology progressed, some of the patients start living longer
while with others the AIDS went into remission altogether and they
are still alive. Doubtless, there are few investors out there who
have been waiting a couple of decades now to cash in on the life
insurance policies that they long-ago bought, and there probably are
not just a few cases where the AIDS victims have now outlived the
investors in their policies.
Eventually, the same thing started happening with cancer patients
who also refused to cash in their chips at the appointed time, and
investors were no longer willing to take anything but the very worst
cases, where no advance in medical technology was going to make a
difference. This selectivity started causing a lot of fraud in the
viaticals market, as people who actually weren't very sick at all
started portraying themselves at death's doorstop and repeatedly
sold policies on their own lives. Then, some viatical fraudsters
simply collected money from investors and never even invested in
policies. This and similar fraud caused the viaticals market to be
viewed as very sleazy (as if dealing in death wasn't sleazy enough
in the first place), thus inviting state regulators in to further
muck up the process with red tape, and driving would-be investors
out.
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