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Lobbyist Money Help  

Viatical companies misrepresented the conditions of the contracts to missouri residents

April 27, 1999
By: Jorge C. Alvarez
State Capital Bureau
Links: HB 1019

JEFFERSON CITY - Jerry Warner and his mother Vera in Independence, Mo., invested in death -- and lost.

Both invested more than $45,000 in an investment called a "viatical" settlement. They were told they would earn from 12 to 20 percent a year for 5 years. In the end, however, they lost more than $15,000.

"We don't know what happened with our money," Warner complained. "These people lived longer than they were expected."

While this quote might seem cruel, it reflects the realities of what viatical companies call "human investments."

Under a viatical settlement, an investor like Warner purchases a person's life insurance benefits for part of the face value. While the policy holder gets less than the full benefits of the policy, the policy gets the money before death. Viatical companies negotiate these arrangements between the insured and investors.

The term "viatical" comes from the Roman term --"viaticum," which refers to the provisions that ancient Roman families gave to soldiers.

It's a bit of a gamble on death. The gamble is that the person will die soon enough that inflation will not reduce the insurance death benefits below what the investor had paid for the viatical settlement.

Viatical investments became more popular when terminally-ill AIDS patients began selling their policies to viatical business in the early 1990's.

"They told me that I was helping these people when they are going to die," Warner said -- although the investor usually does not know the policy-holder's identity.

Jerry and Vera Warner have filed a complaint with Missouri's Attorney General as well as to the Securities Division of Missouri's Secretary of State. But they are not filing a lawsuit.

"Going to trial takes much money", Warner said. "And it is a waste of time when I have no chance to get the money back".

But an official with a viatical settlement company said Warner's complaints amount to sour grapes.

"They are unhappy because they did not win the money they were supposed to win", said Clare Willman, president of a former viatical company in Iron Mountain, Michigan. "Everything was done properly," he said.

Willman said his company, Aide the Living, has gone out of business because of complaints about viatical settlements.

Janice Graves, from Branson, is another investor in a viatical settlement. "I am waiting until the person dies to recover the money," she said.

Currently, Missouri has no law regulating viatical settlement contracts. But it has been an issue for some lawmakers the past several years.

The sponsor of this year's measure is Rep. Russ Gunn, D-St. Louis. "Both sides need to be protected -- investors and the terminally ill," Gunn said.

Under his bill, investors would be given more information about the details of a settlement agreement.

In a recent case pursued by the Secretary of State's Securities Division, the division charged that a viatical settlement company had misrepresented the medical condition of those whose life-insurance benefits were being sold.

According to an order to cease and desist issued by the Missouri Commissioner of Securities, Life Options International, Inc. (LOI) and John Michael Howard, Sr., both located in Tuscaloosa Ala., sold nearly 600 viatical settlement contracts to approximately 250 Missouri residents, most of whom were elderly.

These Missouri residents invested close to $5 million in these viatical settlement contracts. The state charges LOI misrepresented to some of this Missouri residents the medical conditions and life expectancies of those holding the life insurance policies.

LOI has since ceased doing business under that name and could not be reached for comment.

According to Jerry Warner, viatical companies use what they call the "T-cell count", a statistic used to determine the level of HIV infection of an AIDs patient. This figure, according to the state's securities office, is what had been misrepresented.

Although sold as a security, viatical settlement contracts are not required to be registered as securities with the state. It's an omission in the law that even some with the insurance industry say should be changed.

"There are unscrupulous companies that may not take the consumer protection to heart and as a result they may provide folks with less money than what they might entitled to", said Walter Pfeffer, insurance agent with Mutual of Omaha Co. in Columbia

"We currently have no legislation to protect the costumer from bad companies or unlicensed representatives", Pfeffer said.

The bill would allow the Insurance Department to regulate Missouri viatical business and regulate out-of-state firms that operate in Missouri.

Persons selling their insurance benefits would be required to provide informed consent to the sale and the right to rescind the contracts before receiving the payment.

The viatical settlement bill has stalled in a House committee and effectively is dead for the 1999 session. Two years ago, in 1997, the legislature did pass a measure to regulate viatical settlements. However, it was vetoed by the governor.

"The bill mandates requirements that while intended to protect the consumer would actually create unwarranted fear on the part of the consumer and harm the reputation and business of companies who are in good standing and in compliance with the insurance laws of this state," Gov. Mel Carnahan wrote in his veto message.

The governor's spokesman, Chris Sifford, said Carnahan was concerned the measure would have an adverse impact on some Missouri insurance businesses.

On the other hand, the lieutenant governor -- Columbia's Roger Wilson -- supports the bill -- "because it protects from abusing settlements."

Without state regulation, various insurance experts suggest asking a number of questions before investing in a viatical settlement:

* Is thee company licensed to do business in your area and by whom?

* Is the company located in a state that requires licensing of viatical settlements and, if so, is the firm so licensed?

* What is the medical history of the policy owner and what is the person's life expectancy? Based on this information, what is the expected rate of return on the investment?

* What would be the rate of return if the policyholder exceeds the projected life expectancy by one year, by five years and by ten years?

* Can you sell your interest in the viatical contract? If so, under what conditions?

* Do premiums still have to be paid for the life insurance? If so, by whom, for how long and can the premiums fluctuate?