Life Settlements (Beware!)
We have discussed previously reverse mortgages as a source of expensive money that an individual could tap to enhance their income in retirement. An even more expensive source of funds (or risky investment vehicle for an investor) is a life or seniors settlement.
Viatical settlements, precursor product, were focused at people whose life expectancy, due to a terminal illness, was under two years and who were in significant need for funds (e.g. early AIDS patients who could not afford the cost of life extending drugs) and had a life insurance policy in force that they were prepared (encouraged or persuaded) to sell to investors. Life settlements are an extension of viatical settlements where the individual is not terminally, but is sufficiently advanced in age that life expectancy is less than 10 years.
Here are a couple of articles if you are interested in learning more about the subject. Chuck Jaffee in “Life Settlements Satisfy Need For Cash, But Few Really Benefit” explains the product and the exploding market in U.S.. You can read the somewhat dated Canadian story (including an investor perspective as well) in Ed Rothberg’s “CALU Report August 2005 – Viatical and Life Settlements: Investing Without a Safety Net”. The product is illegal in many provinces, and even where it is permitted the uptake has been limited, perhaps due to the better safety net available to Canadians.
The major issues associated with decision to engage in a life settlement, mentioned by Jaffee, include: very high transaction/commission cost, difficulty in determining the value of the policy (lack of transparency and no open market), possible tax implications and potential need for some continued coverage. From the investor standpoint, according to Rothberg, the situation is even worse due to weak (U.S.) or total lack (Canada) of regulation, so be prepared to lose all of your money.