Well guys, that’s it. I’ve found the greatest investment of all time. There’s no more searching.

They’re called viatical settlements, and I had no idea such a thing existed until a couple of days ago. They’re a guaranteed money maker. And not just a little money, either. A lot of it.

No time for any additional preamble. Let’s get to it.

What are viatical settlements?

You know you’ve stumbled upon something good when your spellcheck rejects it. Did you mean vitamin? No. No I didn’t.

Let’s turn to the knower of all things. Define this ish, Investopedia.

An arrangement in which someone with a terminal disease sells his or her life insurance policy at a discount from its face value for ready cash. The buyer cashes in the full amount of the policy when the original owner dies. Also referred to as a Life Settlement.

THAT’S GOOD CUTTIN’ AND PASTIN’, SON.

Here’s how it works in real life. Say a permanent life insurance policy has a cash surrender value of $100,000. Ol’ Jimbo realizes he’s going to kick it in a couple of years, and has a policy that’ll pay out $500,000 when he dies. He wants the cash now, for whatever reason. So an investor might give him $400,000 for the policy in exchange for signing over the death benefit.

Boom, the investor makes a 25% profit. It’s a decent investment if Jimbo dies in a couple of years. It’s a crummy investment if he lingers for a little while. No, you can’t go pull the cord.

Life settlements are very similar to viatical settlements, with one big exception. Healthy people will do a life settlement for many different reasons. A viatical settlement is done by somebody who is expected to die soon.

Life settlements are far more common. Somebody has an insurance policy worth $1 million when they die with premiums of $10,000 per year. An investor pays $400,000 for the policy and continue to make the payments. Say those payments total $100,000 over ten years before Mildred takes a giant dirt nap. That’s a return of $500,000, which works out to 7% annually.

The investor knows they’re going to get paid. We all die, eventually. The only question is when. If somebody kicks it quickly, the return is more certain. If they live longer than expected, you’ve got a crappy investment on your hands.

Investing in them 

The United States has many investors buying and selling viatical settlements. Billions of dollars worth trade hands annually. There are even companies that buy them and then flip them to institutional investors. Think of them as bond equivalents.

If you’re running a portfolio filled with 10,000 settlements, they’ll perform as you’d expect. Insurers depend on the law of large numbers.

Things are a little murkier in Canada. Viatical settlements are illegal in every province except Quebec, Nova Scotia, New Brunswick, and Saskatchewan. AKA the shitty provinces. Provincial legislation prohibits the practice of selling the policy to an investor in other provinces. The policyholder is supposed to let it lapse instead.

It doesn’t take a genius to see the problem with that. The insurance company has a vested interest in such a transaction. They don’t want you to have the choice. They’d much rather you give it up and pocket the difference.

In fact, life insurance agents will get into all sorts of trouble even if they suggest a client sell a policy. Most will immediately fire any agent that participates, perhaps right into the sun. These guys do not mess around.

Marketing such a service to individual consumers is tough. Many people don’t really understand their life insurance. How can you sell something that’s barely understood? I’d also suspect customers aren’t getting great prices for their policies either, since there are so few companies doing business in Canada.

A big province like Alberta, B.C., or Ontario making the practice legal would go a long way towards legitimizing the industry.

Conclusion

It’s definitely kind of morbid to invest in something that pays off when somebody dies. Imagine feeling happy about the death of another human being, even if it is just some Schmoe you never actually met. Viatical settlements will never be very popular just for that reason.

But that also means there are potentially some big returns there. If Canada ever really opens up the market, I’ll definitely take a look.

Hey!

Financial Uproar uses Questrade as his online broker. Sign up today to get five free trades (use the promo code 5FREETRADES). And remember, ETF trading is always free!

Tell everyone, yo!