Investing in Stranger's Life Insurance Carries Big Risks.

You may have been approached to buy a "viatical" -- supposedly a safe investment with a high return.

"Profits guaranteed!" "Your principal safe," the Web sites scream.

But viaticals are a dangerous business today. Cheating is rife. Your potential returns are often stated deceptively. Several states have indicted viatical salespeople for fraud.

It's hard for amateurs to tell the plausible investments from the stinkers -- which makes it risky for amateurs to go anywhere near them.

With a viatical transaction, you invest in a stranger's life insurance policy. That stranger sells his or her policy, for cash. You buy it, or a fraction of it, at something less than the value of the death benefit.

Your payment is divided three ways: some goes to the person insured, some goes to the broker, and the rest goes into a fund for paying the policy's premiums. When the insured person dies, the death benefit -- or the fraction you bought -- is paid to you. Your profit is the difference between what you paid and the death benefit you collect.

Your projected return is based on the person's life expectancy. If the person dies earlier, you get a higher annualized return. If the person lives past his or her predicted life expectancy, you'll have progressively lower returns. You might even be asked to put up more money, to keep the policy in force.

People sell their insurance policies in order to raise cash. Sometimes they're terminally ill and want money for treatment or personal expenses. Sometimes they don't need the policy any more, and can sell it for more than they'd get if they redeemed it for its cash value.

Viatical transactions sound grisly. But they can be fair, if the terms are disclosed and everyone is honestly paid. But sometimes the sellers and brokers are part of a scheme known as "cleansheeting."

Cleansheeters pretend to be healthy, although they're really terminally ill. They buy life insurance based on a fraudulent medical statement. Then they sell the policy to investors, through a viatical broker. Both the cleansheeters and the brokers take large fees.

If the insurance company discovers the fraud within the first two years, it can cancel the coverage. If the person dies within that time, it can refuse to pay.

In either case, you, the investor, would get back the policy premiums you paid but nothing else.

The viatical broker might claim that it will replace any policy that an insurer rejects. But that makes no financial sense. Besides, how do you know that the broker will still be around when the disaster breaks?

If the insured person lives for more than two years before the fraud is discovered, the insurance company generally has to pay the death benefit. But the company can make you fight for it in court, Gloria Grening Wolk of Laguna Hills, an authority on viaticals, told my associate, Dori Perrucci.

Even if you buy from someone not engaged in cleansheeting, you have no idea whether the price you paid for the policy was fair. You'll overpay if the person is in better health than you thought.

When I check viatical Web sites, I find that the potential investment returns are generally not disclosed in an honest way. For example, you might be told that a policy pays a "fixed 42 percent." But that's not 42 percent a year, as you might infer.

Instead, that's your total dollar gain, from the time you buy until the time the insured person dies. If death occurs in three years, you'd have an annual return of 12.4 percent. If the person lived for 10 years, you'd have 3.6 percent.

You don't find many viatical companies explaining that. Any profit, by the way, is taxed as ordinary income, not a capital gain.

In the past few months, several states have moved against questionable viatical companies. Federal investigators have raided some firms, seizing records for investigation. Texas recently secured the first criminal convictions for viatical fraud.

Wolk's book, "Viatical Settlements: An Investor's Guide" is a must-read for people considering an investment ($31.95, through her Web site, www.viatical-network.com. Her chapter unmasking the sales pitches is worth the price all by itself.)

Viaticals appeal to people looking for high fixed returns. But they're likely to break your heart.

Utility Stocks Surge on Move to Deregulation 

If it drives you crazy to have to figure out which phone company costs less, just wait until the juicemen come. The juicemen sell electricity. You'll be asked to pick an electrical service to deliver the power that runs your home. Different companies offer different discounts, rates and fees. Now, about half the states are working toward free-market pricing, with more states ready to jump aboard.

Texas will deregulate in 2001, and most of California by 2002. Then there's San Diego, the nation's freest kilowatt market so far.

In some ways, the electricity markets aren't yet ready for retail competition. For example, power can't easily move around the country because of the limitations of regional grids. Price competition is modest, at best. Some utilities charge that, in the wholesale markets, bidding has been rigged. (The Federal Energy Regulatory Commission is investigating.)

But if, as seems likely, average prices rise in the years ahead, deregulation won't be to blame. Instead, we're facing an "electricity capacity emergency," says analyst Edward Tirello Jr. of the investment firm Deutsche Banc Alex. Brown.

For various reasons, utilities haven't been building many new power plants. While they fiddled, the New Economy started chewing through kilowatts like a grasshopper cloud. We're plugged into multiple phones, faxes, computers, electronic appliances and Sega games. Millions of Web-based services run 24/7.

So it seems that prices were going to rise, with or without deregulation. That's going to attract new investment, which will create more supply, says Roger Conrad, editor of the Utility Forecaster Newsletter.

Standard & Poor's index of electrical companies has risen 20.6 percent this year, compared with just 2.3 percent for the 500 industrials. While you were hunting for high-tech stars, utilities became the next new thing.