Washington ? Even in the best of times, some investors are always looking for that golden, seemingly risk-free investment that will net them fabulous returns.

The latest growing exotic investment promotion is in what are called “life settlements” or “senior settlements” or “viatical settlements.”

They’re ghoulish products by any name. In a life settlement, a life insurance policy holder sells the policy to a third party for less than its full face value.

Although they can be marketed and sold legally, the products are so complex and opaque that they are prone to fraud, including: Ponzi schemes; phony life expectancy evaluations; inadequate premium reserves that increase investor costs; and false promises of large profits with minimal risk, according to the North American Securities Administrators Association, which represents state securities regulators.

Life settlements made it to the association’s most recent list of the top 10 investor traps.

These products started to get public attention when the terminally ill, most notably AIDS patients, started to sell their life insurance policies to raise cash for medical and living expenses. Now, policy sellers are mostly the elderly, typically age 65 to 85 with a life expectancy of 144 months or less, says Stephan R. Leimberg, the creator and editor of “Tools and Techniques of Life Settlement Planning.”

“Life settlements are a typical win-win scenario,” said Andreas Hauss, founder of the International Society of Life Settlement Professionals.

From the investor side, you make money by collecting on the policy’s death benefit. How much is earned depends upon the life expectancy of the insured. The sooner the seller dies, the more money the investment makes.

The life settlement industry was estimated at $5.5 billion in 2005.

In 2008, it had grown to $11.8 billion, according to the Financial Industry Regulatory Authority, or FINRA, which regulates securities firms. “We just want to make sure people are not pressured into a quick decision,” said John Gannon, FINRA’s senior vice president for investor education.

In a typical transaction, a broker, who takes a substantial sales commission, is supposed to help the insured get the highest possible amount for their policy. The insured gets a percentage of the death benefit while still living.

“I don’t think this is any more ghoulish than anything else in the life insurance business,” said Doug Head, executive director of the Orlando, Fla.-based Life Insurance Settlement Association. “If the person most affected is willing to undertake any risk, the rest of us have no place in meddling with that decision.”

Yet Gannon said regulators are concerned that policyholders may not appreciate the risks of life settlements.

Often a number of intermediaries are involved in a single life settlement transaction. This can increase commission charges and add expenses, which may reduce the amount of money the insured receives.

In a July 2009 regulatory notice, FINRA highlighted the gargantuan fees companies intend to charge that exceed “by 100 percent or more” any commission the regulator said it has considered fair and reasonable.

If you’re an individual investor and you’ve received a pitch to invest in life settlements, there’s much to beware. Head and Leimberg said life settlements are not appropriate for individual investors.

Leimberg added that only highly sophisticated investment groups such as hedge funds or pension funds should be buying this investment product.

The problem, he said, is the insured may live longer than expected, significantly reducing investors’ expected returns. And the person could live so long that investors have to pay the insurance premiums for years just to maintain the policy.

Wall Street is trying to figure out a way to securitize or package life insurance policies for sale as bonds. FINRA discussed life settlement securitizations in its July regulatory notice, pointing out that sales of investment products that are derivative of or based on life settlements and related products are likely to increase.

Leimberg says this industry is here to stay. “If you could put this back in the box, that would be wonderful,” he said. “But that’s not going to happen because too much money is involved.”