Nothing is certain in life but death and taxes. Unless you are the government, you lose money from taxes. It is possible to profit from death, however. We'll look at some controversial investments where the last person standing truly does win.
In Pictures: Top 8 Estate Planning Mistakes
Joseph Caramadre, an estate-planning lawyer, is currently under investigation for seeking out terminally ill people and using them to invest in annuities. The basics of the plan were to find people with a limited amount of time left and offer them cash payments, and then place riskless bets on the stock market through variable annuities using their names.
Because these annuities came with a guaranteed payout of the full amount invested upon the policyholder's death, the chance of losing money was eliminated. However, if the stock market went up before the "policyholder" died, then the investors reaped the upside. (Fixed, variable and indexed annuities offer different features. Find out which one fits your needs in Annuities: How To Find The Right One For You.)
Families struggling to meet medical payments were quick to accept the money and sign the forms, but prosecutors are checking into whether the set-up was fully explained to them. Although the thought of investing in someone's death may offend, investments of this nature are hardly new.
Please, I Insist You Go First
Tontines are a very peculiar type of investment. Investors form a group and invest a set amount of money each, much like a mutual fund. Dividends are paid out regularly to each member of the tontine. However, as members die, the dividends to the remaining members are increased. Eventually, the last surviving member of the tontine is receiving large payouts. Governments once used tontines to fund public works similar to the way municipal bonds are used now. When the last member died, the government ceased paying out.
The tontine has largely been relegated to fiction for the last century. In these works, members of the tontine go around increasing their ROI with each thrust of a blade or stroke of the brass candleholder.
Despite the macabre reputation, tontines are resurfacing as a possible solution for retirement. Retirement tontines would work like a group annuity except that is would increase its payouts as retirees passed on. As of yet, this idea is largely conceptual, but the upcoming strain on the pension system via the baby boomers might convince insurers and regulators to give it a go. Sharpen your knives! (To learn more about tontines and other new investment vehicles that could be for you if you are feeling burned by the recession, check out 5 Strange New Ways To Invest.)
The grim reaper makes a better business partner than most because, although he may be late, he always does his job. Viatical settlements are a type of life insurance settlement where an investor takes over paying the policy premium for an individual. In some cases, the investor will pay the insured up front and may even pay a monthly stipend to this person. When the person dies, of course, the investor receives the policy payout. This enrages insurance companies because they see these as "stranger" policies where the investor has no financial interest in the individual.
However, viatical settlements have remained popular because it is difficult to contest - after all, the insurance companies make money selling policies and receiving the payments, so they can't reasonably refuse to pay.
Slightly less controversial is the practice of over-insuring. Companies, for example, may insure their employees because their death affects the company. Establishing an employee's "worth" is subjective, so some companies could over-insure their employees and reap a profit if they died.
Death bonds are essentially what insurers do in reverse. Rather than grouping people to spread the risk of death, death bonds gather higher-risk people in a pool of viatical settlements. Interest is paid as the people die and payouts are received. These grim financers aren't unprecedented. After all, the biggest investors in death are insurance companies themselves. They are simply betting on the long side of the equation.
Insurers hope that their policyholders will, on average, pay into the policy more than they cost the company. The best case scenario for insurers is that the policyholder pays in and survives until the policy expires. Investors in death bonds hope that the policyholder actually gets to use the insurance they're paying for - the policyholder probably has similar hopes to the insurer. (Dealing with dead bodies may not be your ideal job, but you might change your mind when you find out how much it pays. Learn more in 6 Morbid Careers With Devilish Incomes.)
While there are ways to profit from death, and the "market" is extremely stable, it may not be a good idea to load up your portfolio. Morals aside, investors do have to be careful around these types of investments. Excepting Caramadre's clever design, the real returns and risks of viatical investments are often misstated.
Many scams center around brokers taking fees to connect investors to the terminally ill, and then end up with the investor paying years on a policy of a perfectly healthy individual. And when the choice is between taking a loss and bludgeoning someone to death with a brass candleholder, most people accept the loss and move on.
Get on top of this week's most important financial news in minutes with Water Cooler Finance.