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Michigan Office of Financial and Insurance Services (OFIS) Commissioner Frank M. Fitzgerald issued a bulletin reminding Michigan insurance agents that securities registration is necessary to sell viatical and promissory note products. He noted that some promoters are claiming that these investments are not securities, but both viaticals and promissory notes are securities under Michigan law.

Viaticals are arrangements between the owner of an insurance policy (the viator) and a third party (the provider). The provider negotiates with the viator for the purchase of his/her life insurance policy or the beneficiary rights under that policy. The broker then solicits funds from investors to purchase the policies. Older people sometimes sell life insurance policies to viatical brokers in order to get funds they need to pay for long term care costs. Older people are also often targeted as prospective purchasers of viatical products as investments.

The Commission warns agents and consumers that anyone selling viaticals in Michigan without a securities registration violates Michigan law. Agents should not rely on the viatical company to determine whether the investments are securities. Agents are responsible for knowing if investment products are securities and for ensuring that any sale of a security is in compliance with Michigan law. Violation of Michigan securities law can be punishable by revocation of any existing insurance licensure, financial liability for the transaction, regulatory sanctions and criminal prosecution.

Viatical arrangements can also be subject to issues of suitability and fraud. As with any investments, agents are responsible for taking into consideration such factors as age, financial situation and investment objectives of the client. In addition, some viatical settlements are being sold in a way that is misleading with regard to the safety of the investment and the return that can be expected. Making misleading statements in the offer and sale of a security constitutes fraud. Failure to do consider suitability or any fraudulent actions may be subject to civil, administrative or criminal liability.

Agents or persons seeking more information on the proper registration of viaticals, promissory notes and other securities products should call the Office of Financial and Insurance Services toll free at 877-999-6442.

The Florida Department of Insurance (DOI) has charged eight men with fraudulant activity related to the sale of viatical settlements. The eight suspects targeted for arrest are charged with submitting false information on a total of 11 life insurance applications to get more than $1 million worth of coverage from various insurers. The policies then were sold to viatical settlement providers for more than $700,000. These provider-companies marketed the fraudulently obtained policies to unsuspecting investors. All told, the eight are linked to the purchase of a total of 47 policies worth $4.9 million from 32 different insurance companies.

Viatical settlements involve the sale of a life insurance policy by beneficiaries who would like to receive a reduced amount of the policy benefits early, rather than having the full amount of the benefits go to their heirs after their death. Viaticals have traditionally been used as a way to provide cash to pay for long term care and other end-of-life costs for people who are very ill and close to death, although beneficiaries who are not near death can also sell policies to viatical settlement companies. There have been many instances of fraud in both the ways policies are purchased from beneficiaries, and the way viaticals are marketed to the public as investments.

Florida Treasurer Bill Nelson and Statewide Prosecutor Melanie Ann Hines have been probing the viatical business in Florida. Viatical providers and brokers buy life insurance policies, usually from the terminally ill, and resell them to investors who recoup their money plus some return when the insured dies. By selling a policy for a percentage of its face value, the insured can get cash now for medical, living or other expenses, by giving up a bigger payoff at death for one?s beneficiaries. The viatical business once focused on those dying from a terminal illness, now is targeting new clients - usually seniors with high payoffs - who may be willing to sell their life insurance policy to investors at a discount.

The business can be lucrative for dealers. Future First paid the insured as little as 12% of the face value for policies it bought, investigators said, and Life Benefits received a $48,510 commission for helping arrange the sale of just one policy for $122,746. Because of that, there is the opportunity for fraud on two levels. The insured may be victimized in the sale of the life insurance policy, and prospective investors (who are often elderly people themselves) may be defrauded when they purchase these policies as investments.

Nelson now is proposing to expand the state law governing viatical sales by the terminally ill to also cover the sale of life insurance policies of seniors and others. In an interim report issued Friday, the Statewide Grand Jury also made a series of recommendations for consideration by the Legislature, including increasing the penalties for viatical fraud from a misdemeanor to a felony.