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This issue was hot enough two years ago for the John Cooke Insurance Fraud Report to run a front page story. At the time that story ran, many investigators were saying, What’s a viatical? Now, with fraud permeating the viatical industry, investigators are all too familiar with the terminology.
To the few who still may not be clear, a viatical settlement occurs when a terminally ill individual sells his life insurance policy to an investor for a lessened face value, based on a formula of how many months or years the insured is reasonably expected to live.
Take the example of Chuck F. He is a 34-year-old engineer, and he holds a $1 million face value life insurance policy. Chuck is diagnosed with an inoperable and untreatable cancerous brain tumor. His doctors tell him that he has from 6 to 12 months to live, and during that time he will feel fine. Death will come suddenly and without any warning. Chuck decides to party hearty for his remaining time, to live life to the hilt. To obtain the necessary funds for his 6-month party, Chuck enters into a viatical settlement arrangement. He sells his policy meaning that he accepts an agreed upon number of dollars (in this case $750,000) and lists the person (or group) who put up the money as his beneficiary. The investor is putting up $750,000 with a near certainty of receiving $1 million return in 6 to 12 months. A good deal for everyone, right?
Viaticals, however, have fallen between the regulatory cracks because they don’t fit within the definition of insurance transactions and they don’t fit within the definition of a securities transaction. States have been hustling to pass legislation which classifies these transactions and ensures they are properly regulated, but the process is slow and burdensome. And so, viaticals have become a haven for criminals intent on fraud.
The fraud takes many forms. One of the most prolific schemes involves a process known as clean-sheeting. There are hundreds of US companies that will issue a life insurance policy up to $100,000 in face value without requiring a physical examination. When someone learns of a terminal illness, he can (with assistance of a fraudster who understands the viatical system) procure one or more life policies and represent himself as healthy. He then sells these policies, often at a large discount, and parties until he dies. And after the policy is paid, the buyer has his own party on the face value of the policy.
But what happens when someone does not die as agreed? What about the guy who sold his $1 million life insurance policy three years ago after he was diagnosed with AIDS? At the time he sold the policy, doctors agreed that his disease would cause his death within 24 months. The sale price was determined based on this life expectancy. Shortly thereafter, however, he was given a new drug-cocktail, and voila, the disease was arrested and no traces remain. His health is restored, although no one knows if the drug-cocktail supplied a permanent cure or just a temporary one. No matter, there is an investor out there who is out a half million in cold hard cash. And if this investor is a bad guy, devoid of a sense of humor, the formerly sick policy seller is better off dead than cured.
This country is full of hit men. Some professionals demand $25,000 to take out a fingered victim. Others will do the same job for a few hundred dollars. But no matter the price, it’s a pittance compared to the policy limits payoff due from the policy of the victim who went back on his promise to die.
The National Association of Insurance Commissioners has set up a Viatical Settlements Working Group to create a uniform licensing standard to license and regulate those involved in viatical settlements. The group is also charged with creating a model law to govern the viatical industry.
Some brokers are unscrupulous toward both ends. They defraud the insurance company by clean-sheeting, and they defraud the investors by misrepresenting the true facts of the case. And some insureds are guilty as well, generally when they misrepresent the facts of their own case to the potential insurer to obtain the policy, and then sell that policy to a viatical broker leaving the eventual buyer to deal with the problems when the issuing company discovered the insured misrepresented his health on the original application.
Florida viatical company Future First Financial Group was recently indicted on multiple counts (81) of grand theft. Other levied charges included organized fraud and dealing in stolen property. Involved dealers were ordered not to participate in any future settlements until the multiple fraud and theft charges were resolved. Possible victims include 53 life insurance companies covering $9.4 million in face value policies. Florida Insurance Commissioner Bill Nelson’s emergency order, temporarily banning five of the suspected major players from conducting viatical business in the Sunshine State, named Wanda Tappan (president). Joel Seidman (a client representative), Bruna Covelski (VP) and Stan Coveleski (CFO) all of Life Benefits Services and William Sweeney, VP of Future First Financial Group, Inc.
The North Carolina Department of Insurance is actively investigating more than 100 cases of suspected viatical fraud. And they are not alone. Numerous other state bureaus are seeing a rise in their viatical referrals. Federal agencies (e.g., the FBI) have unsolved cases on the questionable deaths (fires, car accidents, shootings) of policyholders who did not keep their agreement to die on schedule so they were helped along, or so it is suspected, by buyers who were eager to realize their anticipated profits.
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