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Death futures contracts

Clark Behind The Headlines
From HLN's Money Expert Clark Howard

I want to give you a special warning about something that's really, really in right now. I call them death futures contracts.

It is a popular thing these days as people are trying to stretch a buck or make a buck.

Here's how it plays out. Let's say that I own a life insurance policy and I don't care that anybody inherits the money. I have this burden of paying the premium. The life insurance company tells me it has a cash value of so much money.

Well, there are people out in the market that may decide that they'll pay me if I assign the rights to them. They then become responsible for paying the premiums for the rest of my life.

They've cashed me out at what they're willing to pay me, which could be three or four times what the insurance company would pay. And then they just sit there and hope that I die in a hurry so that they get the big payoff.

On the other side of it, there are people who are earning very low rates of return on their money. Somebody gives them the pitch, “How would you like to earn 12% on your money?” And you're like, “Yeah, I would, what do I do?”

And so people get lured in to being "investors" in these death futures contracts. They used to be known as viaticals; the more current term is life settlements. If you have a policy, you want to find out what the insurance company will pay you if you were to cancel your policy.

Usually it’s based on what’s known as the cash value number. You want quotes from multiple companies. You may find that there could be some tax consequences for you in receiving the cash versus you leaving the policy in place for a death benefit later on.

Now for you getting involved as an investor, owning these death futures contracts, you have to do more shopping than the consumer. There have been more frauds, scams and rip-offs on would-be investors in these things and there’s no way right now for you to be certain that you’re dealing with legit people.

The risk is just so great that somebody's pulling the wool over your eyes. Be careful out there.

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