Viatical Fraud

Donald A. Kohtz, J.D.
August 16, 2000

Viatical originates from the Latin word “viaticum” — provisions for a journey. A viatical settlement is an act by a person who is terminally ill of cashing in a life insurance policy to pay for the necessary associated illness, medical expenses, and final wishes. This terminally ill person contacts a viatical agent who bids the life insurance policy on the terminally ill person to the many viatical settlement companies.

The package that is sent out for bids includes the terms of the life insurance policy as well as the medical prognosis of the terminally ill person. The viatical settlement company that is awarded the bid agrees to pay 50% to 80% of the face amount of the policy, varying according to the gravity of the terminally ill person’s condition and life expectancy. The company also pays further premiums. In turn, the viatical settlement company sells the terminally ill person’s life insurance policy to an investor who then becomes the policyholder as well as the beneficiary and assumes payment of the premiums of the policy. The purchase takes place when the terminally ill person is expected to live 24 months or less. When death occurs, the investor will receive 100% of the life insurance policy’s face amount from the insurance company. The sooner the terminally ill patient dies, the higher the investor’s return. While returns of 15% to 20% per year are typical for investors, the return can be substantially higher if death occurs early.

The Federal Trade Commission has pointed out that policyholders should investigate thoroughly before entering a viatical settlement. Potential investors and insurance companies should also tread carefully in this area.

The key to identifying a legitimate viatical investment is that the life insurance policy was purchased before the individual was diagnosed as terminally ill. Say, for example, that John Doe has a $100,000 policy when diagnosed with terminal cancer. A viatical company/operator may offer $50,000 to purchase the policy and be designated as its new owner (beneficiary). The viatical agent/company would then offer this $100,000 policy to a potential investor for $68,000. The estimated “term” (length of time before collection of the policy’s face value) is usually the life expectancy of John Doe. The viatical operator would immediately pocket $18,000 from this transaction. The iinvestor stands to gain by paying $68,000 for a policy worth $100,000.

The most common scheme is executed by recruiting applicants who already have a preexisting terminal illness, generally AIDS or cancer. Viatical settlement brokers, licensed agents, and representatives of viatical settlement companies, recruit applicants to apply for multiple “jet issued” policies. They misrepresent the truth and answer “no” to all of the medical questions. Healthy impostors then undergo the medical examination and blood or saliva testing.

In many cases, the insurance agent who issues the policy is a party to the scheme. The agent or one applicant may even submit the same application to many insurance companies. The policies are then purchased by viatical settlement companies, which in turn sell them to unsuspecting third-party investors. The insurance industry is the biggest victim of this fraud and could incur huge losses (conservatively estimated at $1 billion+) within the next few years. However, some investors receive nothing in return for their “guaranteed” investment.

It may seem “morbid” for someone to choose this type of investment; however, viatical investments are legal and can result in high rates of return.


Mr. Kohtz ipractices law with Locher, Cellilli, Pavelka & Dostal, L.L.C., which has offices in Omaha, Nebraska, and Council Bluffs, Iowa. Their specialties are insurance fraud and commercial litigation.

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This article was posted on August 16, 2000.