Understanding Viaticals And Their Risks

By Amy E. Feldman

PHILADELPHIA (CBS) - A viatical settlement is a transaction in which a terminally ill person who holds a life insurance policy sells it to a settlement company that pays the patient a percentage of the policy's face value, takes over payments, and becomes the beneficiary. The person who sells the policy has money to spend while he's alive, often to pay for medical treatment and the people who buy it get the payout after the policy holder's death.

Companies including one called Life Partners got groups of investors together to buy viatical settlements, and based on the life expectancies of the policy owners were promised up to a 20% return on investment. But then a wonderful thing happened: medical advances meant people lived longer. Wonderful for the patients. Awful for the investors, hundreds of whom may be wiped out by the bankruptcy of Life Partners.

The idea of selling a life insurance policy may make sense if it's your best asset to pay for treatment but you have to let the people who would be your beneficiaries know they won't get money or you might not have anyone to pay for your burial.

And, if you're considering investing, make sure you research how much you'll have to pay and the financial health not just of the policy holder but of the company in which you're investing or it'll be your financial future that will be dead on arrival.