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'Death Bonds' Look for New Life

Stocks in this article: C LPHI PRU CS JPM AIG GS

NEW YORK ( TheStreet) -- Sharon Brady, a 66-year-old retired law enforcement officer in Fort Worth, Texas and her husband had spent years setting aside money for retirement. In 2009 the couple decided to invest $50,000 in Retirement Value LLC, and "life settlements."

The investment play seemed straightforward, if not macabre.

Sign with a life settlement company that buys-up life insurance policies from wealthy seniors, usually with a face value of $1 million or more, and then purchase shares in the pool of policies that will pay a steady income as people die off.

The return on the investment is based on the spread between life and death: The settlement company pays higher than cash value for the policies, but less than the face value. If the numbers are crunched correctly, investors could expect a healthy return as people died and the cash and continued premiums outstripped the value life insurance policies at maturity.

"They took out a book and showed us photos and peoples' ages, and there was a doctor who explained what was wrong with each of them and how long they were supposed to live," Brady says. "You are not supposed to wish someone would die, but you make money if they do. So you are really gambling on when they do die."

The pitch seemed based on solid, if not depressing, medical observations. Brady said that the doctor that from Retirement Value claimed to have a 98 percent success rate in predicting deaths and they were shown a list of people who were "likely to die within four years."

The upside was that Brady could expect a 16 percent annual return, according to an article in the Star Telegram.

"I felt a little strange about it. You get such a high return on the money you put down," Brady says.

But then the bottom dropped out of the life settlement market.

"The truth came out later," Brady says. "I got a letter from the attorney general saying they had shut the company down. Apparently people were living twice as long as that doctor was telling us."

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