Somebody asked me about this lady. She purchases viatical settlements with investor money, and touts it as “no stock market risk” and “returns better than the stock market”.
Anybody know anything about purchasing viaticals? I know the primary risk is that the person will live longer than you think, but there’s got to be more to it than I realize.
http://www.97gold.com/2016/01/04/your-money-with-faye-bagby/
Some people are always trying to ice skate uphill.
One of my company’s clients is in this business and they’ve been killing it (pun intended) for more than a decade. The risk is very definitely in the person living longer than expected, but they mitigate it by basing their payment on a model with a longer life expectancy than their doctors and actuarial models suggest.
Cantor Fitzgerald had (has?) an exchange to trade these and it was a relatively liquid market at one point in time. There was a big re-pricing in actuarial assumptions which wiped out a lot of the speculative investors. There was a big push a while ago to package these as ‘steady-non-correlated’ investments with 10% returns.
So this is the thing that they keep advertising on those websites that has “no stock market risk”.
(Ok, I guess this product arose because insurers are low balling policyholders on the unwind of life insurance contracts. It seems that the viatical guy still lowballs the policyholder, but to a lesser extent. So it is just a way to make the secondary market on life insurance contracts more efficient. There are parallels in a lot of other retail financial products actually…)
it’s a great investment if your clients are comfortable with the driver of great returns being people dying earlier than expected. Personally, I don’t have any issues with that, I’d love to invest in these. For clients, we’ve decided that the conversations aren’t worth the return.
Also yes, historically people have been outliving expectations, which has led to challenging returns. Richer people live longer than poorer people, because they have better access to health care. Richer people buy more life insurance than poorer people. Using average mortality rates was a poor decision by these investors in the past. I don’t think they’re making the same mistake as they used to.
I believe the main reason why the numbers appear to be so low is because there is a different tax treatment for the viatical owner than the insurance beneficiary. I don’t believe the viatical investor would receive the full amount tax free like the product intends. Could be wrong on this though.
You are probably correct about the tax treatment difference. This would weaken but not invalidate the “market inefficiency” theory; the investor still has positive expected return (I assume so, anyway). So the product is still undervalued at the buying price.
Also, if there is indeed a net tax loss in this transaction (policyholder loses tax deduction, investor must pay taxes on income), then it’s an even worse deal for the seller. I guess when they are thinking about when they are going to die, that’s not the primary concern…
I know that if you have a doctor’s note saying that the you have less than a year to live, then you can take the viatical settlement tax-free, just like if it were life insurance proceeds. I do not know if that’s true with a person who’s not the policyowner.
I just looked it up, and the investor has to pay ordinary income tax on the gains.
So if you buy my $1m life insurance policy for $900k, you add $100k to your ordinary income when I pass away.
i don’t know anything about these policies but the first two things that come to my mind are:
a major risk is if the policy was taken out fraudulently (i.e. you suspect you have cancer but don’t advise the insurer of this suspicion and don’t attend to that issue until after the policy is in place). if the insurer doesn’t pay and the person who sold you the policy is dead and has no money, you’re not getting any payment at death. there would be a major incentive for a fraudster to sell their life coverage if they know it was based on false information.
also, catastrophic risk exists. for example, if a plague or war came and killed 50% of old people, you’re not going to get the full payout as the life insurer is likely bankrupt. very low risk but comes with a chance of loss and should be priced into the agreement.
I never thought about the catastrophe risk, but presumably, it is priced into the general credit spread of the insurer (the policy is after all, an obligation of the company).
I guess for fraud risk, you could do "due diligence’ by inspecting the policy holder and seeing how unhealthy they seem… Maybe evidence of tampered footage in all their public appearances can confirm illness.
I wonder if there aren’t cat bonds for this risk, just like there is for weather/earthquakes.
There aren’t a ton of old/sick people in this situation, so from what I’ve heard the policy owners are interviewed and a ‘background check’ type of thing is done to eliminate the risk of fraud as you say.
Insurance linked products are generally not efficiently priced…most investors just rely on credit ratings of the mono-line insurance company that insured those products.
you’re onto something. hillary sold her policy to pay for life-extending drugs, and probably for corrupt activities, and turd bought that policy and is cheering for her demise as a result. turd’s worried the media will say she’s alive forever and his RoR will suck.
What do you mean “they’re in the business”? Are they the investors who are actually purchasing the life insurance? Or are they simply brokering the transaction?