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Some Intriguing Fringe Investments


If day trading, commodities or puts and calls are not arcane enough investing for you, I have three ideas that might intrigue. They are - in order of decreasing risk - investing in pending lawsuits, viatical or death bond investments, and factored structured payouts.

If day trading, commodities or puts and calls are not arcane enough investing for you, I have three ideas that might intrigue. They are — in order of decreasing risk — investing in pending lawsuits, viatical or death bond investments, and factored structured payouts.

Structured payouts were created to save the recipients of lotteries, lawsuits and lump sum inheritances from themselves, families and "friends" (originally, in Canada for Thalidomide families). The scary stats are that 25% of all substantial cash awards are gone within two months of receipt and 90% in five years. Structured payouts, usually in the form of annuities, are used to prevent that. And a variety of disability organizations, for instance, whose members might get such monies, do endorse the idea to protect them.

But annuities are rigid and circumstances may change in people's lives to require a lump sum of money instead of a steady, smaller payout. The two ways of doing this are to take a loan against the principle and/or to simply sell the rights to future payouts. Sometimes there's a real need or sometimes just an irresistible temptation to indulge in some big purchase or new investment sparks a hunt for relief. And where there is a perceived need, the market will respond.

So what's the problem you say? I am an adult, it's my money and I want/need it! OK, fair enough. But like all things financial, the devil is in the details. On the payee's side, "transfer fees," and a big discount rate may make the whole thing suddenly less palatable. ("You're only going to pay me how much?!") On the investor side, there has to be a reasonably safe and attractive return to warrant going into this murky business.

It is somewhat reassuring to know that there is both ample Federal and state regulation of such deals, also known as "factoring." Also, the IRS has weighed in with details on the tax implications, which actually might be encouraging to some on both sides of the transaction. Structured payouts are considered asset-backed securities which lends an air of legitimacy.

The second offering for those of you who are either bored with standard investments or want to shoot for a higher return, and a step up in risk of course, are viatical buy-outs. These are life insurance policies where the insured is deemed to have less than two years to live but needs the money now. A perceived life expectancy of more than two years puts your insurance policy investment into a category called "death bonds.”

You, as investor, are named as beneficiary, and pay the insured some amount between the face value and the cash value of the policy. And/or you will continue to pay what are probably high premiums as long as the insured lives. The risk here is that there is no known date of death, so the return on the investment remains a question mark. If the insured dies sooner than the actuaries who calculate the odds/risk expected, your return will be substantially higher than if the insured responds to modern science and/or the miracles of the human spirit and lives longer. I know, it's creepy, but where there is a need and a good profit to be made, somebody will step in.

As you might guess, there are theoretical problems with this idea. First of all, there might be a temptation not to mention pre-existing conditions, such as a fatal illness, which will lead the insurance company to invalidate the policy leaving the investor high and dry. Secondly, what if a bad actor, or even organized crime, decides to invest in a bundle of insurance policies (yes, they are bundled just like mortgages to "minimize risk") and kill the insured to increase the rate of return? Well, at least it represents a potential conflict of interest.

A few notes to finish this area. The whole idea was boosted into prominence by the early AIDS epidemic before there were effective treatments. And after a number of unscrupulous situations were exposed, 41 states have passed regulations governing the use of viaticals. So that by 2002, a study concluded that most parties involved were satisfied with the results.

The third area for you jaded investors to look at, and the highest risk, is investing in pending lawsuits. Lawyers are prohibited from lending their clients money and many plaintiffs need money for all of the reasons that you might imagine. The trick here is who and how to assess the chance of a big settlement or verdict that stands up to appeals, scrutiny and is actually paid out.

Many suits seem an unknown, long, chancy slog up hill. But if the stakes are high enough, and the negotiated payback percentage is high enough, sometimes as high as 50% of any received monies, then there are those high rollers willing to get involved.

I don't know about you, but most doctors are pretty conservative folks who know how hard it is to earn a managed care buck. And looking at the high entry fee and risk of these kinds of deals seem to further crowd our ability to get a good night's sleep. All of a sudden, that diversified 401(k) slowly compounding as we sleep seems like a much better idea. Sweet dreams.

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Victor J. Dzau, MD, gives expert advice
Victor J. Dzau, MD, gives expert advice