Viatical Settlements Investment Fraud
Historically, some insurance companies have offered an accelerated
death benefits option which allows the insured an opportunity to
receive up to 80% of the death benefit at any time within the last
year of their projected life. The remaining 20% is then paid to
the insured's estate.
On the other hand, the business of viatical settlements involves
the selling of a policy death benefit, at less than face value,
by a terminally ill person to a third party. This is accomplished,
for a commission, with the assistance of a broker who offers the
policies to settlement provider companies for bid, with the highest
bidder obtaining the policy for resale to investors. The broker
receives a commission based on the sale price.
Size of the Industry
The dollar amount of viaticated policies has skyrocketed in recent
years. In 1990, approximately $80 million worth of life insurance
was viaticated as compared to an estimated $1 billion in 1999.
Fraud in the unregulated viatical settlement industry has become
rampant; as much as 40-50% of the life insurance policies viaticated
may have been procured by fraud. Experts estimate that investors
have lost more than $400 million in these types of investments
since the industry started in the 1980's. One corporation alone,
charged with 155 felony counts relating to criminal fraud had bad
policies with a face value of $12.7 million.
Clean Sheeting
Unscrupulous individuals in the viatical industry procure policies
by a practice referred to as "clean sheeting" which is
the act of applying for life insurance while intentionally failing
to disclose the applicant's status as being terminally ill. They
can get away with it initially because most insurance companies
avoid the added costs and invasiveness of medical exams and blood
tests by relying on an honor system below a certain policy face
value.
Many insurance agents and brokers assist and often encourage viators
in committing the fraud because it not only provides more policies
than would be available though legitimate means, but it also provides
a much higher rate of return due to the fact they can be bought
from viators so cheaply.
In a legitimate transaction, the ill person usually receives 50%-70%
of the face value of the policy. However, a "clean sheeted" policy
viaticated during the contestable period may offer as little as
10% of the face value because it carries the high risk of rescission,
or cancellation by the insurance company, due to fraud.
Wet Ink Policies
After the policy is issued, the insured person will sell his policy,
or multiple policies from different insurance companies, sometimes
within weeks, to a settlement provider using a broker. This is
referred to as a "wet ink policy" because the ink on
the contract is still "wet" when the policy is sold.
The odds against an individual finding out that he is terminally
ill within weeks of buying a policy are exceedingly high. To see
that happen repeatedly within a short period of time with the same
broker or provider is strong evidence that they are both well aware
that the policies have been "clean sheeted" .
To hide the fact that the policy has been viaticated shortly after
issuance, con artists will obscure viatication by simply changing
the beneficiary to someone at the settlement provider firm. A second
way is to employ a "collateral assignment" which is similar
to where the insured seeks a loan from a third party and secures
the loan by pledging the death benefits of the policy. In fraudulent
transactions they pledge the death benefits but do not receive
a loan.
Contestability Period
Finally, some settlement providers merely delay reporting that
the policy has been viaticated until the contestability period
is over, falsely believing that it is not a crime then. An indication
of culpability is that virtually all parties attempt to hide the
viatication of fraudulently obtained policies from the insurance
company for as long as possible.
The contestability clause for life insurance lasts for two years
after issuance, during which time it may be rescinded by the insurer
for fraud in the application. After this period ends, the insurer
is obligated to pay the death benefit, regardless of any fraud
in the application. Because policies viaticated during the contestability
period may be rescinded, they bring, as mentioned, a much lower
price in the market.
A Case Study
As an investor, you are offered the opportunity to purchase an
interest in a life insurance policy in which the insured is terminally
ill (i.e., viatical settlement).
You are told:
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that your investment will produce
a 100% rate of return because you are assigned a policy with
a face value of twice your investment which you can claim upon
their death; |
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that you will have the option
of reselling your policy once it becomes incontestable (two
years after the date the policy is issued) for 70% of the face
value; |
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and that if the policy is contested
or canceled by the insurer, the promoters will provide a replacement
policy through a "replacement policy trust" managed
by them. |
They say these are better investments than stocks, mutual funds,
annuities, and CD's because viatical investments have the following
attributes:
"Full liquidity at maturity from rock solid 'A' rated
insurance companies!"
"Tax advantaged & hassle free! 100% fixed rate
of return which is fully secured."
"Zero risk to principal, a totally safe investment
with no load & no fees!"
"Short holding periods with early buyout options
available as well!"
"No speculation, no interest rate risk, no market
risk, no economic risk!"
In addition they say you will be making a "humanitarian investment" because
the terminally ill person will be able to use the funds to receive
improved health care; pay off debts; take a vacation, reduce family
stress, and enhance their quality of life. In exchange for your
money you receive a Membership Certificate certifying that you
are a member of Viatical Funding LLC.
After deducting the fees paid to sales agents, viator agents,
and other intermediaries from your funds, you find that the ill
person will actually be left with very little. In this case only
$5,400, which is only 12% of your investment of $45,000, or 6%
of the policy's face value of $90,000.
They fail to disclose to you that the insured was terminally ill
prior to being insured, that they concealed this fact on the application,
and thus subjected the policy to cancellation by the insurer.
Instead of being designated as the sole beneficiary you may find
you share it with creditors and family members, and that the option
to resell the ownership interests is not a guaranteed option, but
rather an "assurance" that they will "make an effort" to
facilitate a resale. In any event, you will not likely receive
a promised 70% of the face value but only the amount another investor
would be willing to pay, less commissions, which could be much
less.
They also fail to mention:
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the risk of the insured living
much longer than the estimated life expectancy, thereby greatly
reducing the annual yield; |
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the risk of their becoming insolvent
and unable to replace a contested or canceled policy; |
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the risk of the life insurance
policy lapsing, or that you will often have to pay the policy
premiums for the duration of the policyholder's life; |
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the 15% commission the sales agent
receives from your investment; |
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who is responsible for monitoring
the health status and location of the insured, obtaining a
death certificate, and making a claim to the insurance company. |
Life Expectancy of the Insured
To determine their rate of return investors rely on a report which
projects the life expectancy of the insured, but there are no minimum
requirements as to who may generate these reports or projections.
One company used a nurse and a plastic surgeon but could have used
the janitor.
Viatical investing is highly speculative and risky. Even when
the policyholder exists and is terminally ill, there is a high
degree of uncertainty in predicting when they will die. New AIDS drugs
and cancer treatments have compounded the risk for investors because
they help policyholders live longer.
Viatical settlements are illegal under Canadian insurance legislation
so Canadian investors should not be involved in these schemes at
all.
Not Enough Sick People
Financial Federated Title & Trust, and Asset Security Corporation
pled guilty after being charged with conspiring to recruit insurance
agents to defraud more than 3,000 investors while purchasing viaticated
insurance policy investments over a three year period.
Another company, American Benefits Services, was ordered to pay
$129 million restitution on a corporate guilty plea in this case
where the three companies fleeced people with promises of high
returns on purchases of life insurance policies from the terminally
ill.
Investors were told that their money would be used to purchase
a beneficial interest in viaticated insurance policies, and that
medical overviews were being performed on the insured persons whose
policies were being bought.
Although at least $115 million in investor monies was taken in,
the promoters used only $6 million of these funds to buy insurance
policies whose total face value was just over $7 million. They
used the balance of the money for purposes totally unrelated to
the purchase of viaticated insurance policies, such as the purchase
of twenty-five houses in Florida, Vermont, South Carolina, Massachusetts,
Georgia, and Toronto, two helicopters, thirty-four luxury automobiles,
three motorcycles, several jet skis and boats and a Fort Lauderdale
burrito shop.
Viatical Industry Terminology
Cleansheeting: Refers to a fraudulent criminal
act committed by a proposed life insurance applicant, and by life
insurance agents who knowingly assist or conspire with the insurance
applicants, by failing to disclose a pre-existing medical condition
in response to a question on a life insurance application which
would affect issuance of the policy.
Viator: A person who has a life threatening
or terminal illness who sells or assigns their life insurance
policy.
Viatical Settlement: The life insurance policy
of a terminally ill person, sold or offered for sale, generally
at less than face value, through a viatical settlement company.
Contestability: Policies are generally contestable
for two years from the date of issue and are subject to being rescinded
by the insurer for cause, such as application fraud and suicide.
Viatical Settlement Provider: A person
who enters into a viatical settlement contract with a viator.
Often referred to as a settlement company or funder.
Viatical Settlement Broker: A
person who, for profit, offers or attempts to negotiate
a settlement contract between a viator and one
or more viatical settlement providers.
Viatical Settlement Sales Agent: A person
other than a licensed viatical settlement provider who
arranges for the purchase of a viatical settlement or
an interest in a viatical settlement from a viatical settlement
provider.
Mortality Profile Report: A report based on a
review of a viator's medical history, which gives a prognosis of
a viators life expectancy. Usually done by a health-care professional
and generally at the behest of the viatical settlement provider
to calculate the value of a viatical contract.
Viatical Investment Broker: Defines a person
or entity other than a licensed viatical settlement provider who
solicits investors to purchase a viatical settlement interest from
a viatical settlement provider.
We Chose to Keep Your Money
Personal Choice Opportunities mislead investors
when they sold viatical securities in the form of loan transactions.
Investors lent money to PCO in order for them to purchase the benefits
of life insurance policies from terminally ill individuals on the
promise that they would receive a return on their investment of
21-25% per annum.
The funds, however, were not used to purchase life insurance policies
but kept instead. Over 1100 investors nationwide are believed to
have invested $80-100 million in these transactions in just ten
months. No evidence of any valid life insurance policies being
purchased has been discovered.
Repercussions for the Industry
Life insurance premiums are based on actuarial tables which are
worthless in fraudulent applications. Insurance companies cannot
afford to pay out large death benefits after collecting small premiums
for only a few years. Even if they don't go bankrupt the added
costs are eventually passed on to other policyholders.
The viatical industry as a whole must take steps to better police
itself. If it does not, it risks ceasing to exist as an industry
either by being legislated out of existence or by being pushed
out of the market after destroying investor confidence in its product.
If this fraud is to be stopped, it will require the total commitment
of the insurance industry. The first step is for the industry to
wake up to the existence and scope of the problem.
Penalties
Currently a person charged with viaticating a fraudulently procured
insurance policy worth $100,000 face value, who stands to gain
tens of thousands of dollars, faces the same penalty as a shoplifter
who takes a pack of cigarettes. A mere sixty days in jail is an
encouragement, not a deterrent which may be why the industry watchdog
has never received a single referral from the industry itself reporting
such fraud.
Life Settlements
Once thriving on those dying from a terminal illness, medical
advances, which are helping patients live longer, has caused the
business to start targeting new clients - usually seniors with
high payoffs - who may be willing to sell their life insurance
policy to investors at a discount.
Life settlements, or the sale of a life insurance policy to a
third party, are sometimes referred to as "senior settlements" because
most of the life insurance policies purchased insure the life of
a senior citizen.
The owner of the policy gets cash and the buyer becomes the new
owner and/or beneficiary of the life insurance policy, pays all
future premiums and collects the entire death benefit when the
insured dies.
People decide to sell their life insurance policies for many reasons.
Some common ones are the changed needs of dependents, a desire
to reduce or eliminate premiums, and a need for additional cash
to meet expenses.
State regulation of insurance generally does not extend to life
settlements. Certain aspects of these transactions may fall under
the various Securities Acts so there can be financial risks involved
when entering into such arrangements.
You should consider contacting a professional tax advisor to find
out the tax implications as life settlement proceeds are generally
not tax free. Also know, if you are the seller that you will be
required to provide certain medical and personal information to
third parties who will be paid the proceeds from your policy upon
your death. These third parties may sell your policy and pass along
your medical and personal information to other individuals.
Typically, life settlements are offered to buyers, for resale
to investors, at a discount from the death benefit. The discount
is for the entire life of the policy, not an annual rate of return.
An annual rate of return cannot be guaranteed. Your rate of return
depends on when the insured dies, and no one can predict a person's
life expectancy. Keep in mind that a life settlement is not a liquid
investment because the return on such an investment does not occur
until the insured dies.
Spreading the Risk
The Alabama Securities Commission issued a Cease and Desist Order
against Viatical & Elderly Settlement Providers, LLC
(VESPERS) Washington, D.C., to stop conducting business
in the state of Alabama after they received information that they
were engaged in the illegal offer and sale of investment contracts
involving fractionalized viatical settlement contracts there.
VESPERS, though not licensed to sell this type of security in
the state, have solicited independent insurance agents to
sell interests in viaticals issued by them with promises of low
risk and high returns of 28-70 percent on two to five year investments
for a 10% commission.
An Educated Guess Offsets Mutual Benefit
05/01 - Dr. Clark Carlton Mitchell, 43, a Miami
Beach doctor working for Fort Lauderdale-based Mutual Benefits
Corporation, one of the country's largest viatical settlement
providers, has been charged with 25 counts of organized scheme
to defraud and communications fraud for allegedly lying about conferring
with the personal physicians of terminally ill policyholders before
assessing their life expectancies. If convicted, he faces up to
150 years in prison and as much as a $130,000 fine.
Estimation of life expectancy is key in an investor's rate of return
in a viatical investment and an improper calculation can be devastating
to an investor. As a result, two dozen elderly investors may have been
misled in their decisions to invest a total of $350,000.Many of the investors
purchased the viatical settlements as part of a retirement plan.
Mutual Benefits was linked to the arrests a year ago of eight men on
charges of submitting false information on eleven life insurance applications
to get more than $1.1 million worth of coverage from various insurers.
The eight were then linked by investigators to the purchase of
a total of 47 policies worth $4.9 million from 32 different insurance
companies, which were then sold to viatical settlement providers,
primarily Mutual Benefits, for more than $700,000.
Investigators said these policies first were "warehoused" with
brokers and then marketed by Mutual Benefits to investors after
the two-year "contestability period" had lapsed. These
provider-companies then marketed the fraudulently obtained policies
to unsuspecting investors.
Seven of the suspects are charged with one count of grand theft
and one count of dealing in stolen property. They're identified
as Ralph Cahall and Richard Fraher Jr., Anthony Marano, Guy Leopold,
Albert Esposito Jr., Joel Seidman, and Edward Hoseclaw. The eighth
was charged with an organized scheme to defraud and four counts
of grand theft. 05/00
Mutual Benefits lost a court challenge to prevent the insurance department
from examining its records where a preliminary review by the department
indicated "obvious fraud" in life insurance applications on
file with the company.
In Florida, there are eight viatical provider companies and about
90 brokers licensed to buy life insurance from policyholders for
resale to investors, who then become the beneficiaries.
To date, the insurance department has executed seven search warrants
and seized more than 1,000 viatical settlement files, representing
more than $76 million worth of life insurance policies that investigators
suspect were fraudulently obtained.
Anyone with information about this case or any possible viatical
fraud scheme in Florida should call the Department of Insurance
Fraud Hotline at 1-800-378-0445. A reward of up to $25,000 is offered
for information leading to a conviction.
Our Future Benefits, Not Yours
02/00 - Several companies and individuals who
helped market to investors about $9 million worth of life policies
that had been "clean sheeted" or obtained by hiding an
insured's terminal illness from 53 life insurers were charged collectively
with 240 counts of grand theft, organized fraud and dealing in
stolen property.
Future First Financial Group Inc., a viatical
settlement provider, and Future First's vice president, William
F. Sweeney, 51, each were charged in one indictment with
81 counts of grand theft and one count of organized fraud in connection
with the marketing of fraudulently obtained policies valued at
$6.9 million.
Wanda Tappan, 56, the president of Life
Benefit Services Inc., a viatical settlement broker; Bruna
Coveleski, 54, the company's vice president; Stan
Coveleski, 55, the company's chief financial officer;
and, Joel Seidman, 44, a client representative, each were
charged in a second indictment with one count of organized
fraud, and a total of 72 counts of dealing in stolen property
in connection with the sale of about $2.5 million in fraudulently
obtained policies.
Last October, the officers of Justus Viatical Group,
were indicted on numerous charges of organized fraud, grand theft and
insurance fraud relating to some $3 million in fraudulently obtained
policies which were bought by the company's two officers, and then resold
to investors for some $2 million.
Future First in some cases paid the insured only 12% of the face value
for policies it bought. For helping arrange the sale of just one policy
for $122,746, Life Benefits was paid a $48,510 commission.
Suit seeks to recover losses from insurance scam
1,000 Ohio investors lose; money laundering,
fraud charges are filed
03/19/04 - AP- DAYTON - Victims of an alleged $20 million swindle
hope they can recoup some of their losses as a court-appointed receiver
tries to straighten out the mess.
"That was my life savings," Barbara McAdory, 61, of
suburban Trotwood, said of the $72,000 she invested in policies
sold by LifeTime Capital Inc. of nearby Miamisburg.
"Everything's down the drain now," she said.
The LifeTime founder and seven others have been indicted in Pensacola,
Fla., on fraud and money laundering charges.
Brad Stockslager, 28, who came to the Dayton area to help his
93-year-old grandmother, said he found that $499,000 of her savings
had been invested in portions of 12 life insurance policies. He
said his grandmother must spend $3,000 a month for assisted care,
not including medical expenses, and receives only about $1,800
a month.
H. Thomas Moran of Oklahoma City has been appointed receiver in
connection with a lawsuit filed in U.S. District Court in Dayton
by H. Thayne Davis of Edmond, Okla., who is seeking to recover
$613,000 invested in policies held by LifeTime. Moran is seeking
to recover money on behalf of an estimated 4,000 investors, about
one-fourth in Ohio.
Among Moran's efforts, he said, will be seeking restitution on
behalf of investors in the prosecutions in Florida and tracking
assets of those accused of defrauding them. He plans to focus on
the $157 million LifeTime portfolio.
Investing in life insurance policies of those near death emerged
primarily as a result of the AIDS epidemic. Terminally ill people
sold their life insurance policies to companies such as LifeTime
Capital for a percentage of the face value, a deal called a viatical
settlement.
The dying got cash to use in their final years, while the investors
who buy the policies were told they could receive returns exceeding
60 percent if the dying -- called viators -- died within their
projected life expectancies.
The lawsuit said most haven't died because an alleged "sham" company
provided false life expectancies of viators.
Gerald Myers of Dayton, a certified public accountant, said he
has six clients who bought LifeTime policies, including a couple
in their late 70s who have their remaining life savings of $800,000
tied up in the policies.
"He has since gotten Alzheimer's and is in a nursing home
under Medicaid," a program for the indigent, Myers said.
Miriam Gates, 64, of Dayton said the $18,000 she and her husband,
Rufus, 68, invested in the policies "was the only thing we
had. It was like a cushion -- we knew it was there to draw on in
hard times."
Lawyer Duffles Loot from Viatical Scammer
LOS ANGELES - 08/06 - (AP) A high-profile celebrity attorney has
settled a lawsuit accusing him of siphoning money from a $90 million
death futures scam that one of his clients ran.
Attorney Robert L. Shapiro, who has represented O.J. Simpson,
Christian Brando and other celebrity clients, reached the settlement
Tuesday with attorney Barry A. Fisher, who was assigned to recoup
the investors' losses from the scam.
Terms of the settlement, which was reached as jury selection was
about to start in the civil case, were confidential. Fisher had
been seeking at least $3.5 million.
In 1997, Shapiro represented David W. Laing, the owner of Personal
Choice Opportunities Inc. in Palm Springs, which purportedly allowed
the terminally ill to sell their insurance policies at less than
face value so they could use the money while they were alive.
Personal Choice promised investors in the company 25 percent returns,
but authorities said the insurance policies never existed.
Laing pleaded guilty to conspiracy to commit securities and mail
fraud and served eight years in federal prison before his release
a few months ago.
Fisher, who was appointed by the court to reclaim the investors'
money, filed suit in 2001 accusing Shapiro of arranging for up
to 12 bags, each filled with $500,000, to be taken from Laing's
home in April 1997 so the defendant could post bail.
Fisher claimed in the lawsuit that Shapiro also took at least
$200,000 of that money for attorney fees - although he should have
known that the money was "illegally and fraudulently obtained."
Shapiro denied any wrongdoing, saying he had acquired the money
from the sale of Laing's home and that his payment had been approved
by a federal judge.
Fisher said outside court he has recovered much of the $90 million
for investors, but about $15 million remains unaccounted for.
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