Insurers serving terminal populations decry their image.

Officials say they are being prevented from serving

A growing number of patients dying from cancer, AIDS and other incurable diseases have turned to a novel approach for settling their personal finances: They're selling their life insurance policies to companies willing to pay thousands of dollars for the policies.

But companies in Los Angeles and elsewhere that deal in what are called viatical settlement contracts are complaining that they're being prevented from adequately serving the public.

Negative stereotyping about the industry and unnecessary regulatory restrictions, they say, are keeping away people who could benefit most from their services -- the terminally ill.

"We aren't reaching nearly as many people who should know about this as we can," complained Mark D. Leeds, an official with the National Viatical Association, a Waco, Texas-based trade group.

Part of the problem, said Leeds, stems from a misunderstanding about viatical settlements. But the industry itself has done little to shed the negative image associated with money and death, Leeds said.

In a typical viatical settlement, a company pays a terminally ill patient up to 80 percent of the value of his or her life insurance policy. The company then cashes in the policy for full face value at the time of the patient's death.

It began with missionaries

The term viatical is derived from a practice in medieval Europe of providing missionaries with funds to sustain them during a long journey.

Some 200 life insurance companies typically insert riders to their life policies called accelerated living benefits, which are unrelated to viatical settlements. Accelerated benefits allow policyholders to collect 50 percent or more of their death benefits while they're still alive. The rest is assigned to a beneficiary, as with a normal policy. Some insurers offer the rider at no additional cost to policyholders, but insurers generally deduct the interest that would have accrued on the 50 percent up to the projected time of death.

In a viatical settlement, the purchasing party buys the whole policy and is entitled to receive 100 percent of its benefits upon the selling party's death. Another difference is that viatical firms are not usually licensed as insurance companies but act more as brokers.

In most cases, viatical transactions are legal and legitimate; buyer and seller reach a mutual accord. But lawmakers in several states, including California, have enacted measures to tighten regulation of the viatical settlement industry.

Since 1992, firms operating in California have had to be licensed and have been required to adhere to state consumer disclosure laws. Model regulations adopted by the National Association of Insurance Commissioners have also attempted to regulate what until recently has been an unregulated industry.

Isolated reports of abuses have cast a shadow on an industry already saddled with critics' claims that its activities are tantamount to ambulance chasing. The reports have done little to inspire government agencies' confidence in viatical firms.

Florida clamps down

In one case, Florida officials shut down a company for obtaining insurance policies and then failing to pay. Other firms have been accused of paying clients, who are often desperate for cash, far less than their policies were worth and failing to provide full disclosure of their agreements.

But industry supporters, including some patient advocacy groups, claim the stereotyping and regulatory restrictions have unnecessarily frightened the public.

There have been instances of abuse, Leeds admitted, but the abuses have been isolated and largely insignificant.

"If you talk to any of our clients, you get a different picture," said Kevin Kurth, community liaison officer with The Access Program, a viatical settlement firm in Los Angeles.

"They see it as a godsend. This is money they receive in the last months of their lives that they can use for anything," Kurth said.

Dean Licitra, an official with AIDS Project Los Angeles, dismissed the negative stereotypes. "Overall, they're providing a benefit. That anyone is making money off of AIDS patients is a moot point from the point of view of someone who needs the money," Licitra said.

However, Licitra said he has concerns that growing competition among viatical firms may lead to abuses, sales pressure and unfulfilled promises and expectations.

Firms act as brokers

According to the state Department of Insurance, California presently has about 33 known viatical firms doing business in the state. At least three of those are listed with the Department of Insurance as being based in Los Angeles County.

Generally, the firms act as brokers for policyholders. They shop for investors willing to invest between 60 and 80 percent of a policy's face value and pay a broker's fee.

Most policies average about $75,000 to $100,000 in benefits. A few firms fully fund their purchases themselves and charge selling policyholders a handling fee.

According to National Viatical Association figures, eight out of 10 viatical clients are victims of AIDS with less than two years of life remaining. The other 20 percent suffer from terminal cancer or other diseases.

By the time clients decide on selling their policies, most are unemployed and too ill to find work, Kurth said. Virtually all of them have depleted their life savings, yet face huge personal expenses, including a staggering amount of medical bills.

Firms paid out $200 million

According to the association's figures, in 1993 viatical settlement firms paid some $200 million to clients for about 3,000 life insurance policies. With an average underwriting amount of $75,000 per policy, the total eventual payout in claims to viatical firms would be about $225 million.

About 50 known firms do business as viatical settlement companies around the country. Therefore, the average payout from these transactions would be about $4.5 million per firm.

The firms have seen enormous financial growth. Earnings from individual firms were not available. But viatical companies as a whole spent an estimated $350 million to purchase policies in 1994, up from $50 million in 1991, according to the association.

But some industry sources, including Kurth of The Access Program, cautioned that the industry is notorious for inflating its figures.

"Lots of numbers are being bandied about without scrutiny," said Leo Orenstein, a Securities and Exchange Commission attorney in Washington, D.C.

In August, Orenstein's office filed a lawsuit with the U.S. District Court in Washington against a large Houston viatical settlement firm. The suit alleges that the firm, Life Partners Inc., violated federal securities laws by selling investment contracts in viatical settlements to investors.