Posts filed under 'life settlements'
Life settlements, for the life insurance industry, is kind of like when you’ve been whacked in the face and it hurts, but the swelling and discoloration of the black eye hasn’t shown up yet.
Life settlements or viatical sales of life insurance policies has been around for 20+ years. Cloaked in some pretty lame arguments, life settlements, the selling of your life insurance policy to a third party for an immediate cash influx, are just about as smart and honorable on the part of the life insurance industry as sub prime mortgages were for the banking industry.
You know something is shady, something is wrong, when the folks that sell life settlements don’t include the beneficiaries, the family of the insured in the conversation. I’m not saying that beneficiaries have some innate right for Mom or Dad to hang on to the life insurance so that they can become enriched upon their parent’s death. What I am saying is that most people who are considering life settlements are being preyed upon by agents that know how to take advantage of someone who is financially challenged.
Why bring in family or beneficiaries? Because in most situations the financial challenge can be met by family, leaving the life insurance in place to do what it was designed to do. In most cases the decision to buy a life settlement is based on the emotion of wanting to take care of financial challenges with bothering anyone. Agents who specialize in life settlements know all about these emotions and they know all too well how to be there to help.
Now life settlements have become big investor news as your life insurance policy, now owned by someone else, is being bundled into funds that are being sold as investments. Forgive the gag reflex, but how sick is that? What has our country come to when we have hedge funds for people to invest in whose profit depends on people dying? How can investors really feel good when they see their return on investment go up, knowing that what that means is that more people died than expected?
And forgive my often expressed cynicism about life settlements, whether individual or bundled into funds, but this is America and capitalism is all about profit. Really, when you think of some of the big companies that have gone down beginning, let’s say, with Enron, what if they had large investments in life settlements. Do you think, I mean do you really believe that companies with all the moral conscience of a purse snatcher wouldn’t start paying say $1000 to have life settlement portfolios closed out by an untimely death? If a company could quietly spend $1000 with an almost instant $1,000,000 return do you really think that there wouldn’t be any consideration of taking that back alley? Folks. This is the same country that is throwing people out of their homes and cutting people’s jobs and all the while making sure that the corporate checking account is full enough to give some sick excuse for a CEO a bazillion dollar bonus.
I guess what amazes me is that this is just now becoming big news just because Wall St (another pillar of social conscience) is allowing hedge funds to be built around life settlements. It was bad news when they first hit the market back at the beginning of the AIDS epidemic. It has been bad news for decades as agents get filthy rich talking people into buying life insurance they don’t need just so they can turn around and sell it. It’s been bad news since they figured out how to finance that purchase for those who couldn’t come up with the money to buy large policies they couldn’t afford.
Bottom line. Life settlements are a black eye on the life insurance industry and a another black eye on our socially lost country. I get calls every week or two from companies that want to know if I will get on board the life settlement train and when they hear my opinion, I think they hear the outrage that is at the core of the part of our country that hasn’t given into sick greed.
October 16th, 2009
I just came across a Huffington Post article written by someone running for office who just discovered that life settlements didn’t go away in the 1980’s.
She was mortified to learn that their city retirement investment pool included what she called “death bonds”. She would probably be even more mortified to know that life settlements or viaticals or whatever name you want to use, “death bonds”, are far more pervasive than she apparently thinks. She apparently thinks that life settlements are only done with those that are terminally ill.
The truth is that the terminally ill are more likely to hang on to their policies. The larger market is those people who want to make money from a place where no money should be made. They want to monetize and sell stock in their own lives. The larger market is made up of greedy people served by greedier agents trying to bend all of the good things about life insurance to meet their own agenda.
But the politician almost makes a good point when she ponders “This asks the question: will corporate America use political influence to delay the development and spread of new treatments that might save lives, but cut profits?”
I’ll go one quicker and more morbid than that? Do you suppose there are large corporations that own these policies who would go so far as to pay unemployed folks $500 or $1000 to whack some of these million dollar checks waiting to be cashed? Cash flows quicker and you don’t have to wait on politics!
It’s like the whole world woke up this week and decided there’s a beast on the horizon and we should all look out for it. What they seem to have missed is that the beast has been here for a long time, it is huge and may already be too big to slay. Reuters and the New York Times both had articles expressing concern over the life settlement market and how these sick investments are being bundled into funds. What the hell has our country come to?
Bottom line. The fact that these products are being bundled into funds speaks to the size of the sick practice. The fact that anyone is actually recommending funds that include this type of shady practice is just so 2009 American. What we’ll do if we think there is a buck to be made would make all of our grandparents roll over in their graves.
September 9th, 2009
I’ve never minced words about what a horrible idea life settlements are. A life settlement is when you sell the ownership of a life insurance policy on yourself for some amount of money, and they are then the owner and beneficiary when you die.
Personally my stance has always included the fact that life insurance is always underwritten taking into account the mortality risk, but no one has done a mortality study on those who have sold their life insurance policies to a third party. Yes, secretly embedded in that sentence is the idea that if someone else has a vested interest in your death and that interest gets less valuable every year, who’s to say you won’t get whacked if profits are looking a bit too slim?
Of course the life settlement folks will put our minds at ease by telling us that these policies are sold to institutions and not to individual investors. Makes me feel better. I’ll bet institutions with TARP money can afford better hit men anyway.
But off the subject a little. Then there is the really stupid idea called premium finance coupled with a life settlement. There was a really great article yesterday that explains all the fun details better than I can and also breaks the news that those clients who have done it and the brilliant agents that talked them into it are in the process of getting hosed or are getting in line at the hosing place.
Bottom line. It all comes down to a deal too good to be true. You pay almost nothing for a policy for two years and then an investor pays you handsomely to take over ownership. Free money? If it sounds too good to be true…….
June 2nd, 2009
A month or so ago I talked about a client of mine who, over the course of 4 years, has been working with me to get his rate down from the very first approval we were able to get through Empire General at a table 8, to a just approved standard plus rate with Banner Life.
I hold this client up as an example of how, when a client is really involved with the process, positive things can happen. This is a guy who has provided study results, pathology reports, and gone out of his way to get a checkup that he wasn’t even due for, simply because he knew that it would help our battle to win him better rates. We were able to improve the rate each year because of his willingness to do whatever it took. His rates were over $12,000 a year. They’re now under $4,000.
In contrast are people who contact me for insurance quotes and know little or nothing about their medical situation and for sure aren’t going to call their doctor or run by the doctor’s office to get a copy of labs or a pathology report or a copy of a stress test or a sleep study. The act as if I am imposing on them to ask for more information than they can provide me right then and there when, all I’m really asking for is exactly what an underwriter needs.
If I am providing a quote for someone with diabetes, I need to know their A1c. If it’s a history of cancer I need to know the stage and grade. If it’s heart disease or if someone has had an angioplasty or bypass surgery, I need a copy of their stress test so I know what their ejection fraction is. With sleep apnea, a copy of the sleep study is needed like all of those other things, to ensure that the quote I provide is accurate.
I can’t tell you how many times I’ve heard over the years, “Well, if it’s going to be that much of a hassle, just forget it.” I always wonder if they then turn around and tell their wives that they would have bought life insurance but the agent wanted me to call my doctor’s office and it was just too much hassle.
I suppose I am beat out of some of this business by agents who don’t hassle anyone and just quote what they want to hear, or just shoot from the hip without all the facts, but the truth is that asking for that information serves two purposes in the process. First, if the client provides the requested information, it ensures an accurate quote and generally means that I can expect them to stay involved through the application process. Second, if they don’t take that small part in their own quest for life insurance, at least in my experience, they won’t end up being a cooperative client through the rest of the application and they also have a higher lapse rate than those who really get involved.
Bottom line. Not everyone gets preferred plus rates and those with serious health issues need to find a good independent agent and get involved in their own destiny if they don’t want to over pay or explain to their spouse why they are just going to go without.
May 5th, 2009
If someone offered you money for your term life insurance policy, which we all know has no value unless you’re dead, would you take it? If you were sick and had been racking up medical bills and someone offered you enough money to pay those bills, let’s say $100,000, in exchange for ownership of your $500,000 life insurance policy, would you do it?
Life settlements, viaticals, really came on the scene in unison the with AIDS crisis. With AIDS victims taking expensive experimental drugs to try to beat the disease, a new market was born under the guise of helping them out, but with the intent of making a quick buck. Often an AIDS patient would be offered as much as half of the death benefit of their policy in trade for the ownership rights of the policy. The patient got money now to pay for treatment and when the treatment didn’t work, the new owner got the death benefit. Back then people with AIDS usually didn’t last more than a few years and the dirtball, I mean new owner, of the policy could often double their money in very short order.
As a practical matter viatical sales to AIDS patients fell victim to better and better drugs that extended their lives well beyond any models used by those selling the contracts. That left the new policy owners holding the policies far longer than anticipated which effectively lowered and often negated any profits.
History lesson over. Fast forward to the 21st century. One thing about dirt balls is that if you don’t do something to get rid of them, they’ll just keep on coming back. Viatical sales were repackaged and given a softer and gentler name, life settlements, and a new way of target marketing was formulated. Rather than AIDS patients, the new audience for this pitch was the older, sicker person with a measurably short mortality expectation. It was the same song and dance, just with new dancers. Depending on the actual life expectancy, a cash offer would be made to purchase the ownership of the policy.
The cash offer is computed by determining life expectancy, and these companies believe they can do that very accurately. Then the annual cost of premiums on a converted policy are determined and the formula is something like years left to live times the annual premium plus a substantial profit subtracted from the death benefit. So, that might look like 4.5 years left to live times the converted annual premium of $32,000 equals $144,000. A little slop in case the person lives too long plus a healthy profit, say another $200,000. If the policy had a $450,000 death benefit, the insured person would receive the leftovers of $106,000.
A real downside to this is that very often this is kind of done behind closed doors and the counsel of family members may never be heard. Many beneficiaries of life insurance policies never find out the policies were sold and they are no longer beneficiaries until after the death occurs and they are cleaning up estate matters. That’s when they find out that because of a slick sales job, the family missed the opportunity to convert that policy themselves and net $300,000+ after premium payments.
Another target for life settlement agents are older people with “excess insurability”. That would be someone who, based on income or net worth, could carry say $5,000,000 worth of life insurance, but because they’ve never felt they needed that much they only carry $1,000,000. The have $4,000,000 of excess insurability. An agent talks them into applying for and purchasing the additional amount, even though they don’t need it, holding it for 2 years to get beyond the incontestability period, and then selling it at a profit over the prermiums they’ve paid.
These types of practices have our governing bodies seriously reconsidering the golden egg in life insurance, the fact that the death benefit is not taxable as income. So, while all the schemes and scams are going on, the goose that laid that golden egg is in real danger.
Bottom line. There are some well oiled life settlement agents out there. They know how to make you want it and how to make it easy. If anyone approaches you about selling your life insurance policy, consult with your state insurance commission on where to get the other side of the story.
Just an aside. There is huge money to be made by agents who handle these transactions. They are not non profit organizations.
January 31st, 2009
I’ve made no bones in the past about my issues with the life settlement or viatical market. In addition to the fact that many life insurance companies are opposed to the practice, I have not been convinced that it is an ethical practice.
The idea of someone in poor health selling their term life insurance policy for a discounted amount of cash, at least to me, has that “preying on the sick” feeling. More than one study has shown that in most instances the family of the insured would have been better off to keep the policy and convert it themselves in order to get the full death benefit. It’s no wonder that families aren’t encouraged to be part of the sale discussion in this process.
Anyway, suffice it to say that the reasons for not recommending life settlements as they have been done in the past far outweigh any reasons to recommend it.
I have just recently started reviewing information on a different take on life settlements that may (may not) be something I would present to a client. The jury, for me, is still way out on this, but I wanted to share some of it anyway.
With this new structure, a life settlement or payout on an existing term insurance policy would only be considered if the old policy was coming available for settlement due to the purchase of a new policy. My understanding is that a client would actually have to have a new policy in force in order to be approved for the settlement.
As opposed to viatical sales that typically involve people in very poor health, this life settlement process would actually require someone to be in good health to be approved for a new policy. The settlement would not be the big bucks percentage of the death benefit seen in viatical sales, but rather a percentage of the premiums paid into the old policy. That takes the flashing the big bucks aspect out of the equation.
This new process would also require that the client complete the conversion of the old policy before it is purchased by the settlement company. This is a gray area for me as it appears to be an attempt to waltz around the issue of insurable interest on the conversion. There has been talk by congress of changing the tax free status of life insurance that has gone through a life settlement, and with the conversion and transfer of ownership happening separately it appears that it might fly under the radar of what congress is concerned about.
Bottom line. Still opposed to life settlements. I think in the long run they have the ability to damage one of the few bright spots in our economy, the health of our life insurance companies.
November 12th, 2008
I think you can count on seeing this type of stance from more and more companies. Protective sent a memo out to agents today stating, “Protective Life Insurance Company will not issue life insurance policies planned to be re-sold in the secondary market, often referred to as Stranger Owned Life Insurance (SOLI) or Investor Owned Life Insurance (IOLI).
These types of secondary market arrangements are not within our underwriting criteria, and we will return any applications for policies that are either directly or ultimately intended to be part of such an arrangement. If such a case is inadvertently underwritten, upon our discovery we may refund the premium and rescind the policy.”
Bottom line. They aren’t the first major company to take a hard line on discouraging life settlements and you can bet they won’t be the last. Let’s hear it for prudent and reasonable.
September 18th, 2008
I always seem to take a public beating when I bring up life settlements because I’m opposed to them and those who aren’t really take offense to those of us who are. But, to the question. Could increased sales of life settlement contracts lead eventually to higher prices for term life insurance?
I think it’s important to underscore some of the assumptions that have helped term life insurance rates keep going down for so many years. The simple explanation that mortality experience is improving helps explain the downward trend, but the historically low cost per thousand is based more on the product and how it is handled by the consumer.
When you look at someone who is paying $200 a year for $250,000 worth of 20 year term insurance, most folks understand there must be a factor that is driving the ability to offer insurance at that ridiculously low rate. The two top factors are the tendency for people to lapse their coverage before the end of the term, and the tendency for relatively few people to convert their term policy to permanent coverage. The reason these two factors drive down the cost of term life insurance is that both of them mean that the insurance company has collected premium and not paid a death benefit.
This keeps the cost of term insurance low. If everyone kept their term to the end of its’ guarantee and then converted it to permanent coverage and kept it in force until they died, companies would have to factor in paying death benefits on all policies, something that is not even remotely in the picture at this point.
So, life settlements! It used to be all about getting older, less healthy people to sell their term policies to third parties. As this practice has grown, I believe it has at least subtly changed the dynamic that has kept term insurance costs down. More policies are being converted by the new owners of a sold policy than was anticipated when the policy was originally priced.
The newer surge in life settlements targets younger, healthier clients who, having come to the end of a guarantee, sell their old policy and buy a new term policy. I believe that this newer market is the one that will eventually tip the scales and start driving term rates up.
Congress has blessed life insurance proceeds with a tax free status for a long time. Life settlements have many in government questioning why they should give tax free status to something that is sold as an investment. They have a valid and strong argument and personally I hope they take action to withdraw the tax advantage from policies that are sold as investments, life settlements.
Bottom line. None of this happens overnight, and I don’t expect that one person making a few bucks selling their term insurance policy is really going to care if that impacts the industry, but I care. It’s a good industry and it is taking off in directions that aren’t necessarily in the public’s best interest. The world according to Ed!
September 9th, 2008
This is an area involving life insurance that is receiving more and more attention and a topic where the troops (life insurance agents) are definitely divided. A life settlement involves the sale of your policy to a third party. The third party takes over ownership, future premium payments and becomes the beneficiary of the policy.
Why would a person consider a life settlement? Two reasons really. This generally involves term insurance and a person may simply not need the policy anymore. If a policy was, for instance, purchased to cover a key person in a company and that person has retired, the company may wish to recoup some of their premium payments through the sale of the policy.
The other reason is simply that the owner of the policy needs money and sees the sale of the policy as an easy way to get cash. This can be an unfortunate choice when long term family protection is bagged for a short term cash fix.
A few things about life settlements. First, the policy has to be within the conversion period. The new owner needs to be able to convert the policy in order to keep in force until your death. Second. You really need to be sick to get any significant amount of money out of a policy. A healthy 65 year old, if they are offered anything at all, won’t be offered much. I have seen this process of elimination work and the companies who do life settlements evaluate a case and determine, at least to the satisfaction, how long they believe you will live, down to the year and month. They then base their offer to you on the face amount, minus what they will have to pay in premiums on the converted policy, minus a healthy (very healthy) profit.
In most cases, in my opinion which happens to coincide with a large number of financial advisers, if you are sick enough to get a worthwhile life settlement, you are better off converting and keeping the policy yourself. Your family will net more benefit almost every time.
Then there is my own bit of discomfort with life settlements. Life insurance is all about mortality assumptions based on statistics that have been built up over long periods. Underwriters use assumptions when deciding rates for people with heart disease, diabetes or a history of cancer. My discomfort with life settlements is that there are no mortality studies that I’ve been able to find for people who sell their life insurance policies to a third party.
This country harbors one of the greediest corporate mindsets on the planet. If a life settlement group has a large block of business and profits aren’t where they need them to be, who’s to say, especially in today’s unemployment situation, that $500 here and $500 there might not hasten the mortality experience a bit. I’ve had plenty of viatical and life settlement agents tell me that assumption is hog wash and I would suggest that they allowing their greed for the sale to overwhelm their common sense. People get rubbed out in this country all the time for a lot less than hundreds of thousands or millions of dollars.
Bottom line. As for me and my agency, we will not recommend or participate in life settlement business.
July 17th, 2008
