A company that buys and then resells life insurance policies from the terminally ill has a new product meant to make such "viatical settlements" more attractive to investors.
Dedicated Resources of Delray Beach, Fla., this month introduced an insurance twist that protects investors in this growing market against the possibility that a patient will outlive doctors' expectations, delaying payback.
The broker's new Viatassure product will pay principal and interest no later than 30 months after the expected term of the investment-even if the insured is still alive.
Dedicated is buying the coverage from Lexington Insurance Co., a Boston- based subsidiary of American International Group.
Viatical settlements provide terminally ill patients with money when they need it most. In return, the insured name the investors as beneficiaries.
Investors typically pay 50% to 80% of policy value; the percentage depends on how long the patient is expected to live.
The insurance component will certainly improve the appeal of the niche product, said Felice L. Larmer, chairman of the brokerage unit at First Merit Corp., Akron, Ohio.
"It removes the uncertainty," she said.
Last year First Merit, one of three banking companies selling Dedicated's uninsured settlement product, earned $104,000 from those sales.
First Merit does not advertise the product but makes it available to sophisticated investors with specific portfolio needs, she said.
Most of the buyers have been doctors, because they understand the product and patients' situations, Ms. Larmer said.
"There are so few products that a bank brokerage can sell that are truly unique," Ms. Larmer said. Viatical settlements offer the bank's clients, "particularly our more sophisticated clients, something they can't get anywhere else."
Banks receive a 4% up-front commission for selling Viatassure, said Alan H. Blank, president of Midwood Financial Services in Encino, Calif. Midwood is the sole distributor to banks of Dedicated's products.
Viatical-settlement products are categorized by doctors' estimates of patients' life expectancies.
The uninsured version of Dedicated's product based on the life policies of people expected to live 24 months would pay principal plus 28%.
But just when is in doubt, and the investor must pay the premiums for the underlying insurance until the insured person dies.
The Viatassure version of the 24-month product would pay principal plus 19%-when the insured person dies or at 54 months, whichever is first.
The customer "can earn rates in excess of Treasuries and still go to sleep at night," Mr. Blank said.
The open-ended feature of these viatical-settlement investments has been one of the biggest concerns, experts say. In 1996 the issue gained center stage when a group of AIDS drugs were introduced that invalidated the life expectancies for viatical settlements already contracted, said William E. Kelley, executive director of the Viatical Association of America, a Washington-based trade group.
In the resulting turmoil, 10 of its 27 members pulled out of the business-at a time when 90% of the settlements involved AIDS patients.
The industry has since adjusted underwriting standards, he said, and settlements are better balanced among illnesses, with 50% relating to AIDS today. In 1998 about $1 billion of policies were purchased, compared with $450 million in 1996, the association estimates.
"We've just scratched the surface," Mr. Kelley said. One example of the market's potential is the industry's controversial new move to buy life insurance policies from older Americans who are not terminally ill, he said.
Midwood's Mr. Blank said he deals with a small number of banks. The minimum investment for Viatassure is $10,000, and because of the limited number of policies available he may sell only $10 million per month, he said.
But that's a big figure by viatical industry standards, Mr. Kelley said.