Betting on death.(viatical insurance)(Buyers Guide)

Sarah Lorenti and Scott Ericsson have never met, yet the two are locked in a deal to the death. In early 1997, Lorenti and her husband, Raymond, then living in Naples, Fla., invested $50,000 to purchase a 22 percent share of Ericsson's $256,000 life insurance policy. According to papers they received from Mutual Benefits, the Fort Lauderdale company that brokered the deal, Ericsson, who does not want us to use his real name, had "advanced HIV disease" with a 6- to 12-month life expectancy. Under an arrangement called a viatical settlement ("viatical" comes from a Latin word meaning provisions for a journey), he would get a percentage of the policy for his immediate use. After he died and the insurance company paid off, investors would receive their share of the claim, in the Lorentis' case, $56,320--a solid 12.6 percent return. "The salesman said viaticals were better than CDs [certificates of deposit] or stocks," says Lorenti, 72.

Ericsson, a postal worker from the Midwest, is alive, and Lorenti is still waiting for the payoff. Though she continues to receive letters periodically from Mutual Benefits reporting that Ericsson's condition "remains terminal," Lorenti, whose husband has since passed away, now wants the funds to meet her own needs and worries that she'll never collect.

To disease-stricken people like Ericsson and investors like Lorenti, viaticals looked like an arrangement from which both sides could gain. Terminally ill patients facing devastating medical expenses could receive cash from an insurance policy to see them through their final days. Investors would be rewarded with a tidy return from a sure--albeit morbid--bet.

Such attractions have been the wellspring of a growing business. In 1998, according to a report by Conning & Co., an insurance research group, the 40 to 50 mostly small companies that made up the industry exchanged about $1 billion in life insurance policies, up from just $50 million in 1991. Now, the industry is moving to extend the marketing of viatical settlements to healthy seniors through so-called "life settlements," a vast market potentially worth $108 billion. Many viatical insiders believe that eventually Wall Street companies will sell shares in large pools of "used" insurance policies.

LEGAL AND ETHICAL DILEMMAS

The industry has been dogged by problems--and thorny ethical issues. Insufficient consumer protection has left viators (the people who cash in their policies) with inadequate payments and investors stung after promised returns up to as much as 30 percent or more fail to pan out. Fraud has been so common a problem that the North American Securities Administrators Association, a group of state investment cops, named viaticals one of the top ten investment scams of 1999, along with telemarketing schemes and get-rich-quick seminars. Thirty-three of the 73 viatical companies CONSUMER REPORTS found operating in 2000 had been in trouble with regulators in the past two years. Among their problems: failure to register with securities or insurance authorities, misuse of investor funds, misstatements about the medical condition of patients, and a fraudulent practice called "cleansheeting." Under that scheme, viatical companies solicit patients with life-threatening chronic or terminal conditions to lie about their health and apply for life insurance policies, which are then resold to investors.

Yet despite all the problems and abuses, viatical settlements can be a godsend. Arline Maisel, her three brothers, and two sisters despaired when they learned in mid-1997 that their dad, stricken with prostate cancer, had six months to live. With three children still at home to support, Hank Maisel, 61, was too ill to work, and a failed business deal had left him broke. "He was only a few payments away from losing the house," says Arline. By selling half of Hank's only asset, a $500,000 term-life insurance policy, however, the Maisels were able to raise enough after the viatical company pocketed its $59,000 share of the proceeds to meet medical expenses and clear up debts. Hank died in 1999, and, says Arline, "I am convinced he lived an extra year thanks to the money."