Article: viatical mess

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Article: viatical mess

Postby jhh9327 » Sun Apr 13, 2008 2:36 pm

Local article (Rochester, NY) about some people suing an agent for selling them "safe" investments in viaticals that has not turned out so well costing them most of their retirement money. Tough subject to feel too much sympathy for the article's "victims."

Charles DePoint's nest egg is dead because four people are not.

The 51-year-old from Palmyra, Wayne County, began building his 401(k) savings plan when he took his first job out of college as a laborer at Garlock Sealing Technologies 27 years ago. Since then, DePoint has eschewed exotic vacations, new vehicles and housing repairs in favor of saving for a comfortable retirement. By the time he left Garlock for another company in 2003, his 401(k) had swelled to $408,000.

On the advice of his financial adviser, DePoint said, he invested it all in four viatical settlements, transactions in which a terminally ill or elderly person, the viator, gets money before death by selling his or her life insurance at a fraction of the policy's face value. When the viator dies, the investors collect the benefit.

DePoint says that his adviser, Richard H. Nichols of Newark, Wayne County, told him that he would earn at least a 50 percent return on his investment — nearly $220,000 — within five years. DePoint said he was told it was a risk-free investment.

That time has passed, DePoint has lost $300,000, and the rest is in jeopardy. What some viatical brokers promised to be a sure bet has turned financially fatal for thousands of investors across the country — including dozens in the area like DePoint, who staked their life savings on the life expectancy of people they have never met.




http://democratandchronicle.com/apps/pbcs.dll/article?AID=/20080413/NEWS01/804130352&referrer=FRONTPAGECAROUSEL
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Postby LoopyGinJuice » Sun Apr 13, 2008 2:43 pm

Wow. I had no idea such an industry existed. That is just messed up.
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Postby overpar » Sun Apr 13, 2008 2:56 pm

Actually this is a huge business and very big with hedge fund money. It's more pleasingly referred to as a "life settlement"
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Postby Ken Schwartz » Sun Apr 13, 2008 2:59 pm

DePoint says that his adviser, Richard H. Nichols of Newark, Wayne County, told him that he would earn at least a 50 percent return on his investment — nearly $220,000 — within five years.

An interesting aspect of this story is that the promised return wasn't extraordinary. An equity investment with an annualized gain of 8.5% would produce a 50% return over a five year period. I guess the intended victims are assumed to be mathematically challenged.
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Postby RaleighStClaire » Sun Apr 13, 2008 4:31 pm

And if he had just put his money into DFSVX in 2003 he would have gotten his 50% return in the first year!
Where's that red one gonna go?
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Postby mickeyd » Sun Apr 13, 2008 5:40 pm

What some viatical brokers promised to be a sure bet has turned financially fatal for thousands of investors


Now that HIV is somewhat "curable" and folks are living longer with dreaded diseases, viaticals are in for a beating since medical science is progressing faster than they can scarf up LI policies of the sickly folks. I have been getting mailers on this stuff for about 15 years. None lately tough.
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Postby Index Fan » Sun Apr 13, 2008 6:59 pm

Incredible that when it comes to money, people entrust their life savings to someone without getting several second opinions.
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Postby stratton » Sun Apr 13, 2008 9:46 pm

I remember Don MacDonald discussing these on his financial radio show from 1989-92. Even then the problem is, "What happens if the person lives longer than expected or they get cured?" Dealing with a contract attached to one individual is just as risky as buying a single stock or bond.

Paul
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Postby DiscoBunny1979 » Sun Apr 13, 2008 10:54 pm

mickeyd wrote:
What some viatical brokers promised to be a sure bet has turned financially fatal for thousands of investors


Now that HIV is somewhat "curable" and folks are living longer with dreaded diseases, viaticals are in for a beating since medical science is progressing faster than they can scarf up LI policies of the sickly folks. I have been getting mailers on this stuff for about 15 years. None lately tough.

=======
NO HIV is not "curable" even though folks are living longer. Maybe what you meant is that HIV is becoming more manageable, but it certainly still leads to death if not treated. And those folks on meds, often costing $25,000 a year, are experiencing complications from living longer - which means the drugs are producing side-effects that help bring about the problems of old age at a much younger point in one's life.

I know one person that specifically sold his policy in the 1990s and most recently the Insurance Company has decided that because he can stand or walk and that he is not dead yet from AIDS that he shouldn't be continuing to get his waiver of premium that was granted for that past 14 years - even though he could stand or walk when the waiver was granted and that his AIDS diagnosis hasn't changed. This means that the policy will lapse (because he isn't going to pay the $700 each quarter that's required to convert the policy to an Indivudal one) . . . and the folks that bought the right to be his beneficiary will never see a dime.
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Postby Random Musings » Sun Apr 13, 2008 10:58 pm

Talk about "dead money".

RM
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Postby Czilla9000 » Mon Apr 14, 2008 12:30 am

Whoa....a couple of years ago a really rich friend of my family started up a company that bought these things. I wonder how they are doing...they wanted to pay my dad and I to find seniors to buy the policies from! :shock:
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Postby nisiprius » Mon Apr 14, 2008 6:12 am

Two lessons here.

One is the folly of basing investment decisions solely on the numbers.... like the entities that bought bundles of securitized subprime mortgages, which seemed to have attractive past performance and good ratings from the rating services. If you can't look at least slightly behind the numbers, and if you haven't made some independent attempt to evaluate the investment--independent of whatever story you've been told by the person selling it to you--you shouldn't invest.

The second is greed. Undoubtedly there do exist wonderful opportunities, that are not just luck, and which can legitimately spotted before other people have heard about them. But nobody is going to come out of nowhere and offer them to you. And huge rewards are always going to be coupled by huge risk. The story says:
DePoint says that his adviser, Richard H. Nichols of Newark, Wayne County, told him that he would earn at least a 50 percent return on his investment — nearly $220,000 — within five years. DePoint said he was told it was a risk-free investment.
There are no risk-free investments that will earn 50 percent within five years... unless, of course, inflation reaches 10% per year.
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Postby corner559 » Tue Apr 15, 2008 4:36 am

My company started to get into the viatical business earlier this year, and my department spearheaded the development of an IT project to track them.

My co-workers explained the whole thing to me, and I've got to say I've never been more embarassed to work for a company than when I learned what we were selling. Even after hearing the "pros" the entire premise of this investment still makes my stomach churn.

This type of investment should be illegal.
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Postby wshang » Fri Aug 15, 2008 9:03 pm

corner559 wrote:Even after hearing the "pros" the entire premise of this investment still makes my stomach churn. This type of investment should be illegal.


Most people count their life insurance policies among their assets. Insurance companies profit handsomely from premature termination of policies. In other words, most of the insured decide to let their policies lapse when achieving a stable retirement or before being able to convert to whole life. Insurance companies would like nothing more than making the resale of personal life insurance illegal.

The cash value of such policies may be unlocked by selling the policy to a ready buyer. There is a huge difference between seeking the death of another and being a willing buyer, if someone wishes to sell one of their assets - in this case life insurance. The "evil" analogy might be buying distressed or repossesed property at auction. I think a better analogy would be buying a 3 year depreciated car rather than driving one off the lot.
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Postby larryswedroe » Fri Aug 15, 2008 9:08 pm

Here is a huge problem. You sell your policy and someone now has an interest in your dying early. That is why tontine policies were made illegal long ago.

So say you sell your policy and the Russian mafia is the buyer.
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Postby sscritic » Fri Aug 15, 2008 9:22 pm

larryswedroe wrote:Here is a huge problem. You sell your policy and someone now has an interest in your dying early. That is why tontine policies were made illegal long ago.

So say you sell your policy and the Russian mafia is the buyer.

You get divorced. You collect social security. Your ex-spouse collects a divorced spouse's benefit. The divorced spouse has a strong incentive to kill the the retired worker to switch to widow(er)'s benefits, which may be double the current benefits or more. A divorced spouse who begins benefits at 62 gets 35% of the worker's PIA, while if the worker waits to age 70, the worker will be getting 132%. The gain from 35% to 132% of PIA is a gain of 277%. A benefit of $500 a month as a spouse would become $1885 as a widow(er). If you plan to delay retirement to age 70 or repay and restart at 70, watch out for your ex. Now there is someone who has both a personal and financial interest in your dying early!
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Postby mephistophles » Fri Aug 15, 2008 9:32 pm

Several large, highly reputable companies I am licensed with not only do not sell viaticals but discourage their agents and brokers from writing viaticals with anyone.
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Postby nisiprius » Fri Aug 15, 2008 10:08 pm

larryswedroe wrote:Here is a huge problem. You sell your policy and someone now has an interest in your dying early. That is why tontine policies were made illegal long ago.

So say you sell your policy and the Russian mafia is the buyer.
What's the difference between an income annuity and a tontine?

For better or for worse I bought an SPIA from Vanguard (AIG) last year... The sooner I die the less AIG has to pay out on the annuity. It would definitely help AIG if all of their annuity holders were to die young. (Ditto for anyone with any kind of life annuity, I assume).

Do I need to fear that AIG will try to kill me? If not, why not? (Presumably because AIG is a big company and they'd never do a thing like that? because it's, you know, against the law? or is there a better reason?)

Uh, what about the Social Security Administration...
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Postby turbo » Fri Aug 15, 2008 10:56 pm

Ken Schwartz wrote:An interesting aspect of this story is that the promised return wasn't extraordinary. An equity investment with an annualized gain of 8.5% would produce a 50% return over a five year period. I guess the intended victims are assumed to be mathematically challenged.


What about a ten year period? What has the S&P returned in the past ten years?
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Postby Pacific » Fri Aug 15, 2008 11:15 pm

nisiprius, you'd better watch your step!!
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