AIDS patients aren't the only people who have been stung by viatical settlements. Some investors too are feeling pain--because a new generation of drugs has changed the equation.
Investors who buy the rights to an AIDS patient's life insurance policy earn a high return only if the insured person dies soon. By prolonging life, new AIDS drugs reduce that profit.
"We've got old people investing in the deaths of young AIDS patients and the AIDS patients are going to outlive the investors," said Bill McDonald, chief of enforcement for the California Department of Corporations. Investigators say they don't know how many have lost or will lose their money.
In the early 1990s, when AIDS deaths peaked nationally, some investors did earn promised returns of 20% or more.
For example, someone who invests $10,000 for the right to $12,000 in life insurance proceeds for an AIDS patient will make $2,000--an annual rate of return worth at least 20% if the insured dies within a year. But if the insured person lives four more years, the investor's return drops to 4%.
Investors who buy policies on the assumption that patients will die soon are left cursing the people who sold them viaticals--often trusted insurance agents, financial advisors, even relatives.
"He told us they were all on their deathbeds," said Pauline Grissom, 70, who with her husband invested $52,000 in viatical settlements in 1996. The Palm Springs-area couple bought the policies from a neighbor's nephew.
None of the Grissoms' shares of four life insurance policies, each covering an HIV-positive man, has paid off. Still, each year Mutual Benefits Corp. charges the couple $116 for "bookkeeping."
Viatical companies often hide the names of the people who are insured from those invested in their deaths. But Grissom's son, an accountant in Colorado, recently tracked down a couple of the men named on the policies Grissom and her husband bought.
"They were still alive and taking the new medicine," said Grissom, "and they hoped we didn't wish them any bad luck."
As investment in insurance policies of AIDS patients loses its appeal, viatical companies have expanded to "senior" or "life" settlements, in which aging people sell their life insurance policies for cash. This has spawned a secondary business: "stop-loss" insurance, to cover the losses of people betting on death when death doesn't come when expected by the investor.
William E. Kelley, executive director of the Viatical and Life Settlement Assn. of America, said life settlements are attracting attention from large institutional investors, including banks and insurance companies.
"This is a new way to look at an insurance policy as a financial asset that can be converted into cash," he said.
But some regulators worry that the new business in viatical settlements creates new problems.
"Should we, as a matter of public policy, be encouraging what is in effect betting on how long you're going to live?" said McDonald, the California Department of Corporations investigator.
"The opportunity for fraud in this whole industry is so irresistible that we ought to be more concerned with stopping fraud than with worrying about whatever legitimate industry there is in this," he said.