Making A Killing

By Daniel Eisenberg

Michael Lee Davis is probably the last guy from whom you'd want to buy life insurance. True, he does have some experience in the field. Davis, a.k.a. Walter Waldhauser Jr., spent most of the 1980s in prison for hiring a hit man to wipe out a friend's family in order to get a share of their life-insurance proceeds. But after being released on parole, Davis found a new line of insurance work: a largely unregulated offshoot of the business called viaticals.

A viatical is not another impotence wonder drug. Rather, a viatical (from the Latin viaticum, a payment given to Roman officials before embarking on a journey) is a way for a terminally ill or elderly person (the viator) to get money before he dies by selling his life-insurance policy at a discount. The discount, usually 10% to 40% of the policy's face value, is based on the viator's life expectancy; once the viator dies and a broker takes a commission, the investor collects the rest of the benefits. A decade ago, viaticals were embraced by the AIDS community as an ingenious way for patients to get some cash for their final days.

Then in 1996 Congress made the proceeds from most viatical settlements tax exempt, and the business really took off. Increasing numbers of terminally ill people, including those suffering from cancer or heart disease, have sold their life-insurance policies to enjoy their death benefits while they're still alive. This year alone, more than $1 billion in viatical settlements, only about half related to AIDS, will be brokered, according to the National Viatical Association (NVA), roughly 20 times as much as when the business began. Relatively healthy elderly people are also hawking their policies for some additional income; $3 billion in so-called senior settlements will be brokered this year.

Tom Volz, president of the Columbia, S.C., visitors' bureau, has advanced prostate cancer; he's been given two to three years to live. A few months ago, he received the funding for his viatical settlement, which handed him $58,500, or roughly 40% of his $150,000 policy. "There are some things I'd like to do, but I didn't have the resources for, like a trip to Hawaii or herbal remedies not covered by insurance," says Volz.

Unfortunately, viaticals have attracted con artists the way blood does leeches, and regulators are contemplating halting, or at least restricting, the practice. The problem is with folks like Davis, indicted on fraud and other charges by a Dallas County grand jury last summer. He persuaded scores of unsuspecting Texans to shell out millions on supposedly low-risk, guaranteed investments in viaticals offered by his Dallas-based company, First American Fidelity Corp. But authorities say the policies were fraudulently obtained for the express purpose of reselling them, an increasingly common practice dubbed cleansheeting. Davis allegedly solicited HIV-positive men to lie about their medical condition and buy multiple $50,000-to-$100,000 policies, which usually require no medical exams or blood tests. His lawyer denies the charges. As Davis awaits trial, his victims are stuck holding some $10 million worth of policies that are probably worthless.

Last May the North American Securities Administrators Association cited viatical scams as one of the country's top 10 financial cons. "I like a lot of people in this industry, but I don't trust a lot of them, and that's sad," says Carole Fiedler, of Sausalito, Calif., an established viatical broker who each year helps about 100 people find buyers for their policies. "I hope there's a weeding-out process."

There will be, if regulators and prosecutors in states from Florida to California get their way. Late last summer a federal grand jury in Florida indicted Frederick Brandau and his company, Financial Federated Title & Trust, for allegedly defrauding thousands of viatical investors across the country in an elaborate, $115 million Ponzi scheme. Brandau's attorney denies the allegations. Just a month ago, two officers of Justus Viatical, a Pompano Beach, Fla., firm, were charged with selling investors $2 million worth of fraudulently obtained life-insurance policies. Their lawyer calls the indictment a farce. And insurance heavyweights like American General and John Hancock Mutual Life have recently fought in the courts to rescind bogus policies.

As the number of would-be viators has increased, the industry has gone into hard-sell mode, promising fail-safe, above-market returns. The harsh reality, though, is that investors are in some measure betting on the death of the sellers. If the person whose policy you buy dies in a year, it's a great investment; but if he lives five, it's a dud. "Profitability is related to the predictability of death, which has proved to be singularly unpredictable," says Bill McDonald, chief of enforcement for the California Department of Corporations, who thinks viaticals may need to be outlawed. In Florida, Mutual Benefits Corp., a Broward County viatical provider, was recently sued by investors for misrepresenting the life expectancy of AIDS patients, and therefore the return on the investment, by providing inaccurate information about new treatments. The company denies the charges.

Many viatical deals are marketed to seniors looking for a slightly better return on their retirement income. Ursula Linke, 60, of Silver Spring, Md., and her husband, tired of earning a relatively paltry 4% to 6% on their annuities, moved their entire life savings of $700,000 into viaticals sold by Liberte Capital Group of Toledo, Ohio, which claimed to pay 14% on a one-year maturity. "We wanted to have a sound investment, retire and have some peace and tranquillity," says Linke. After the first few quarterly payments arrived from the company, the money suddenly stopped coming. Liberte Capital blames its escrow agent for the problem. Now Linke and her fellow investors' money is frozen while a court-appointed receiver tries to resolve the dispute.

There are other pitfalls. In many cases, if the viator lives longer than expected, investors can end up having to pay premiums to maintain the policy. And unlike stocks or bonds, these are highly illiquid investments. That means that in the event of an emergency, there's no quick, easy way to get your money back.

Viators can be victims too. There are brokers who reap hefty, 18% commissions without getting the sellers--often ill, vulnerable people--the best deal available. One viator who went through Alpha Capital Group, a viatical provider that is fighting a cease-and-desist order from Washington State, ultimately received $5,400, or 6% of the policy's $90,000 face value.

Industry representatives support uniform regulation but hope officials don't go too far in their zeal to crack down. "It's a critical option that every terminally ill person should have," says Valerie Cooper, executive director of the NVA, who claims scam artists don't represent the bulk of law-abiding viatical providers, like Page & Associates and the Ardan Group. Gloria Wolk, chief consumer advocate for viaticals www.viatical-expert.net) is worried that money for legitimate viatical settlements could disappear: "Fraud can destroy this industry and leave patients high and dry."

Competition may provide an alternative. To help slow the growing appeal of viaticals, more insurance companies are offering so-called accelerated death benefits, which, like viaticals, award a certain portion of the policies' face value to terminally ill patients before they die. That way, people can take it with them, and there's little chance that investors will be taken.