Dear Mr. Berko:

This firm wants me to invest $10,000 in a “viaticle,” which they promise is safe, secure, risk-free and guaranteed by a big insurance company. They promised a sure return of 25 percent in 12 months. That sounds good to my wife and me because, as you know, we can only get 3 percent on certificates of deposit. Please tell me what a viaticle is and how it works. And please tell me if my wife and I should invest $10,000 in a viaticle.

O.S.  Shawnee, Okla.

Dear O.S.:

Let’s assume that my 65-year-old friend Orville X. Monash purchased a $100,000 life insurance policy 10 years ago from Heaven Mutual Life Insurance Co. Now, let’s assume that five years later Orville was diagnosed with “bilateral monochronal sambucliosis”, which can be 100 percent fatal within two years of onset. The doctor tells Orville that he has just 12 months to live and Heaven Mutual Life (which is A-plus rated by Agfxes) stands ready, upon Orville’s death, to pay the beneficiary the sum of $100,000.  The insurance agent who sold that policy to Orville six years ago suggested that he can sell that life insurance policy for about $50,000 in cold, hard cash right now. Orville says to himself, “I’ve only got 12 months to live, I’m gonna take my $50,000 and blow that money on things and stuff I’ve always wanted but never had the money to buy.”

The insurance agent gets a letter from Orville’s doctor stating that Orville only has 12 months to live. He takes that letter to a company that specializes in buying and reselling these kinds of policies. This kind of company is called a viaticle company. The word “viaticle” derives from Latin “viaticum,” a noun used in ancient Rome meaning money or supplies given to a traveler for a journey.

The viaticle company reviews the doctor’s letter, talks with the insured as well as Heaven Mutual and is satisfied that Orville only has 12 months remaining. The viaticle company gives Orville’s agent $63,000, and the agent gives Orville $50,000.

Now the viaticle company has $63,000 invested and then turns around to peddle the policy to someone like you for $83,000. So far Orville got $50,000, his insurance agent pocketed $13,000, the viaticle company made a cool $20,000 and you’re left holding the bag hoping that Orville dies in 12 months, that science doesn’t come up with a cure for bilateral monochronal sambucliosis and that the diagnosis made by Orville’s doctor is right.  If Orville dies in 12 months, you’ve got a $17,000 profit on an $83,000 investment, which is the current return and a total of just about 20 percent.

That is, if Orville cooperates and does what he’s supposed to do. But if Orville refuses to cooperate and dies in two years instead of one year, that you’ve still earned $17,000 but in two years instead of one. So instead of getting all your money back, plus $17,000 in one year (that’s a 20 percent annual return), you’re getting all your money back plus $17,000 in two years which is a 10 percent annual return. But if Orville is real stubborn and holds on for five years, you still get your $83,000 back plus $17,000 in five years and that’s a 4 percent average annual return.

There are huge commissions selling viaticle policies and I’m aware of some agents and viaticle companies that have taken 35 percent off the top. The only guarantee you have with a viaticle is that the insurance company will pay upon the death of the insured, providing the insured has not made any material misstatements on the policy application.

There’s no guarantee that the insured will die on schedule. There’s no guarantee that a beneficiary or an heir will not contest the settlement. And lastly, if you are part of a group purchase (you don’t have $83,000 but five investors and you put up the money) and a member of the group decides to be a “ganef,” that person can use legal tactics to delay collection and force each of the remaining five participants to pony up an extra $1,000, $2,000 or $3,000 apiece to him.

Now, I don’t know that viaticle firm in Shawnee. But if their promise of 20 percent interest plus a 5 percent bonus scares the bejabbers out of me. Look, O.S., the safest and most secure investment is probably a one-week Treasury bill and that return is less than 1.5 percent. So if this viaticle were a safe, secure, risk-free and guaranteed investment, why are they promising you a 25 percent return?

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or visit his Web site at www.berkoradio.com.  © Copley News Service  Visit Copley News Service at www.copleynews.com.