Tontines, viatical life insurance and other death related words are a subject of intense interest to the living. Life insurance is the most common of death benefits and is usually touted as the ultimate gift to grieving families. It will pay for the funerary costs and, if the heirs are lucky, leave a little or a lot besides. A whole host of other schemes have been devised to play on the same fears and hopes of the aged and their heirs. They include tontines, viatical settlements and “en viager” agreements.
It’s true that for those fortunate enough to be on the receiving side of these agreements, the rewards can be substantial. Still, one wonders if these windfalls are just “dust in the wind” and the real winners are those who have passed on.
In any event, here are some of the more popular financial schemes that pass and have passed as retirement planning now and in the not too distant past.
Another financial tool for raising capital, the tontine was introduced in the late 17th century and has enjoyed enormous and ongoing popularity for the over 300 years. The basic premise involves investing a sum of money in return for a dual benefit annuity. In the first [place, the funds are invested and the investors receive an annual dividend. In addition, upon the death of the penultimate member, the final surviving member is entitled to the entire capital investment.
The tontine has been used as a plot device in innumerable novels, plays and films. Even The Simpsons have devoted an episode, "Raging Abe Simpson and His Grumbling Granson, " to the concept. Although outlawed in most of the Western world, the tontine is still recognized as a valuable financial instrument and is in use throughout the world today.
A viatical settlement, or simply viatical, is the sale of your existing life insurance death benefit for more than its surrender value but less than the death benefit. Typically, only whole life policies are interesting to investors as term policies can expire before the death of the insured.
The latest rage for viatical settlements came into being and peaked ruing the AIDS epidemic in the U.S. in the 1980s. An unfortunate combination of circumstances left young, gay men with an significant asset. With no young children or spouses, their insurance would, in most cases, pay benefits to people who didn’t actually need the funds.
In stepped investors, who offered to pay more than the current value of the policy but less than it value on the death of the insured. In this way, the insured could reap most of the benefits of the policy.
As in any other human endeavor, bad actors entered the fray. Many life insurance policies were obtained under false pretenses by terminal patients and then sold for gain. These actions gained a measure of notoriety for viaticals but, today, the policies are now more studiously scrutinized and are an important financial tool for terminally ill patients.
"En Viager " or Payments "For Life"
Another fascinating, death-related, financial activity called “en viager” is confined almost exclusively to France. The practice involves the transfer of a piece of real estate. Instead of an outright sale, however, the buyer makes a much smaller one-time payment and then pays rent to the owner. Upon the owners death, the real estate becomes the property of the buyer.
The practice is common and popular in France as a way to unlock the assets of a home without having to move. The gamble, for both participants, is on how long the current owner will live. The upside is that the owner has a guaranteed income for life and the buyer can possibly obtain a property at a significantly reduced rate.
The process works well in practice although much has been made of some extraordinary outcomes. In one particular instance, in 1965, a 47 year old man purchased an “en viager” from a 90 year old woman who smoked and drank. 30 years later, the buyer died and the woman lived on, become the oldest living person in France and then died, happily we presume, two years later. The buyers widow ended up with the property.
Arguably, not a scheme, life insurance provides many benefits in the 21st century. Still, it has not always been put the best use.
Technically, “insurance” is coverage for a event that might happen whereas “assurance” is coverage for an event that will happen. In the United States, purportedly to avopid confusion, both insurance has come to cover both situations. In any event, the death of the insured triggers payment of the benefit.
A double indemnity insurance policy simply multiplies the death benefit if the insured is killed by accidental means. Contrary to the premise of the famous Billy Wilder movie, the policy pays in the event of murder by anyone other than the beneficiary but does not cover suicide.
Life insurance has been the object of many treacherous schemes. Besides outright murder and faking your own death, there is now “stranger-owned” life insurance. As the name implies, the insured is given an up-front benefit, usually in the form of a non-recourse loan to satisfy some legal considerations, and the death benefit accrues to a third party. The accumulation of these policies that are then sold to investors is the origin for the term “dead pool.”
These types of policies have been around since the mid 18th century but they took an unscrupulous twist when several institutions of higher learning, who were actually encrusted with safeguarding the welfare of their students, took out policies on those same students.
As part of their admittance package, students signed a document allowing the university to obtain a life insurance policy against their death. Once discovered, the subsequent public uproar ended the practicein the mid 1990s.
You Still Can’t Take It with You
All of these financial instruments have had their day in the sun and each has been abused by the unscrupulous. It is the human condition to look for gain without the concomitant pain. The overwhelming problem with these schemes is that many of the beneficiaries are reluctant to wait for the insured’s appointed time. Instead, they take matters into their own hands and, usually, pay the consequences when caught.
Still, these investments can and do play an important part in the life of the living and will continue do so as long as there is death.