So I just finished reading this piece in today's WSJ (online sub req'd). I've never followed the insurance industry that closely, except back in my Primerica Financial Services days (yes, yes) so I had no idea that viaticals had fallen off. This is an interesting concept, and it just goes to show that any stream of income -- no matter in which direction it moves -- can be securitized.
This does make me wonder how you assess the risk of a policy, or of a portfolio of policies. As the article states, the investor would prefer that the insured have a higher risk of immediate death. The closer the seller of the policy is to death, the more I could see the payout being. However, considering that the risk of death is likely based on health and well-being factors, I wonder how you get access to that information legally in this age of HIPAA, identity theft, and all the other perils associated with information access.
Still, it looks like just a matter of time until these things are packaged and re-sold, creating a secondary market for such policies. I guess you could tranche based on the likelihood of death, e.g. the type of illness, the organs affected, length of illness. I'm sure some math Ph.D.s somewhere will come up with models for all of that.
Financial innovation at its finest.