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By CK Wilde for 3GenFamily Blog
My father only had a couple thousand dollars of life insurance in force by the time he turned 83. He outlived the term of one policy, so the insurance company paid him the cash value and terminated the policy.
As someone who was deeply affected by the Depression, Dad would probably have jumped at the chance to sell a life insurance policy for more than the cash value. But, as someone in the early stages of dementia, he was vulnerable to being swindled. We had one close call with his investments.
I want to alert you to the booming business in life settlements that is still largely unregulated.
Help for the Terminally Ill
It started out as a compassionate way to help someone who has large medical bills to pay. It’s called a viatical settlement. It gives a person, typically with less than two years to live, who owns a large cash value life insurance policy but does not have a spouse or children, a way to get cash out of the policy.
Cash value insurance policies (also called whole life) have provisions for the owner to cancel the policy and receive the “surrender value”. But, this amount is usually very small compared to the total amount of insurance. The settlement company is usually willing to pay much more. The viatical settlement became popular during the 1980’s as a way to help terminally ill AIDS patients deal with the high cost of medical care.
A New Investment is Born
The purchased insurance policies from those early viatical settlements were sold to individual investors. Because this new investment was unregulated, it attracted some unscrupulous dealers. Salesmen were paid high commissions to sell the policies to investors who did not always understand what they were buying. The investment community soured on buying settlements.
In 2001, the National Association of Insurance Commissioners released the Viatical Settlements Model Act which established guidelines for ensuring sound business practices and avoiding fraud. It was about that same time that settlement dealers began purchasing policies using institutional capital. The demand for settlements as an investment began to increase.
Better Than Mortgages?
From an investor’s standpoint, buying insurance policies is even better than buying mortgages. Everyone dies! As long as the insurance policy was written by a company that is solid, the investor gets paid.
Investing in mortgages, once considered much safer than stocks or bonds, is not as predictable. People can get sick or disabled, lose there jobs, or have other life events that prevent them from paying the mortgage. US economic problems today were caused in part by defaults on mortgages — many made by unscrupulous brokers who bent the rules.
Most mortgages today are combined into packages that re-sold to large institutional investors. It wasn’t long before some enterprising folks figured out that they could package these purchased policies, now called life settlements, and sell them to institutional investors for generous commissions.
Easy To Be Taken In By Easy Money
It happened to Larry King, CNN’s famous talk show host. King alleges in a lawsuit filed recently that he was the victim of a scam to buy and sell life insurance on himself, also called “flipping” policies. While King made $1.4 million on the deals, he now realizes that he would have been better off if he had kept the policies. He feels that he was cheated.
An insurance company owns the $15 million in policies, a company by the name of Coventry Insurance. Coventry was sued last year by the State of New York for alleged predatory practices.
Yesterday, our local newspaper, the San Jose Mercury News, reported that flyers were circulating at a San Luis Obispo, California senior center telling seniors they could get as much as $50,000 from “investors that want to speculate on our life expectancy.”
Although the NAIC issued the Viatical Settlements Model Act in 2001 and amended it in 2007 to strengthen consumer protections for “Stranger- Originated Life Insurance” only 35 states have officially adopted the guidelines. California, where I live, has not yet adopted any guidelines.
What’s The Harm?
If Larry King, who is a reasonably intelligent 73 year old, could be duped, anyone could be. Particularly someone in the early stages of dementia.
Life insurance is just one part of a total financial plan. Selling a life insurance policy really needs to be evaluated in terms of the person’s overall needs and financial status. These life settlement companies are not doing that.
So we caregivers need to be alert to these issues. If your parent tells you about a wonderful opportunity to sell an old life insurance policy, get to the financial planner or attorney to have the deal reviewed right away. Who is buying the policy? Will it be sold to a third party? Who is that?
The Mercury News article quoted Jay Adkisson, an attorney who writes a blog about financial fraud, “You ought to know who you are selling to. You don’t want Tony Soprano buying your life insurance policy.”