Life Settlement Rules
Rules proposed for ‘death bonds’
Life insurance policies sold to third parties
The financial industry that surrounds the trading of life insurance policies — a practice that allows third-party investors to collect money when a person dies — is growing. With its pending bill in Olympia, Washington joins 23 other states with a proposal to put stricter rules on a macabre investment system.
The transactions, known as life insurance settlements, have been dubbed with the darker term “death bonds” when they are bundled and sold as Wall Street investments.
Life insurance settlements are a legitimate business, which allows people to dump old policies in return for cash. But critics say the industry has spawned scammers who take advantage of the elderly by giving them money up front in return for a new life insurance policy. Then the scammers pay the insurance premiums and wait for the senior citizen to die. When a senior dies, the scammer collects life insurance money. The sooner the death, the fewer the premiums paid, the better.
“I think it’s a questionable practice,” said Sen. Jean Berkey, D-Everett, a co-sponsor of the bill.
People should generally care about what they insure, Berkey said. Just as a stranger wouldn’t buy an insurance policy for someone else’s boat, she explained, strangers shouldn’t buy life insurance policies on someone else’s life.
She said she is not likely to pass the bill out of committee, however, because it is not ready.
John Mangan, regional vice president at the American Council of Life Insurers, had harsher words for the immediate buying and selling of life insurance policies to seniors. He called the scheme “a mask for wagering on human life.” And such wagers are illegal, he added.
“It’s gaming the system,” Mangan said. “The subject of it is a human being usually between 70 and 85 years old.”
The practice pits investors against senior citizens, as the former get a bigger return if the latter dies sooner. Also, seniors have to pay taxes on the money they receive, a fact that many realize too late.
And it drives up the cost of insurance for others, Mangan said.
CNN’s Larry King inadvertently brought public attention to the issue last fall when he sued a broker and claimed that he was scammed. King had purchased — and immediately sold — a life insurance policy that was worth $10 million upon his death. He received $550,000 for selling the policy, according to the lawsuit documents posted by the Web site The Smoking Gun. But King would have been better off keeping the policy, the lawsuit charges.
Similar deals are occurring in Washington, Mangan said, but “we don’t know if one has exploded yet into the public eye.” Such deals become contentious when they end up in court, he said.
The scams are marketed in person and via the Internet, including on sites such as Craigslist, Mangan said.
On Friday, the Seattle Craigslist page contained an advertisement that sought agents to sell life-settlement packages.
“An agent can make well over six figures on a single life settlement transaction,” the listing said. “Please contact me today so that we can discuss the potential of this terrific industry.”
No name or phone number was provided. There was no reply to an e-mail to the ad’s writer seeking more information. Mangan, after hearing the details from the Seattle P-I about the ad, said it sounded suspicious.
Life settlement companies are not all shady, and many have requested that their industry be regulated, said Rep. Steve Kirby, D-Tacoma, the sole House sponsor of the bill.
Coventry First, a leading life settlements company, recently sent a representative to testify in Olympia.
“I truly believe that life settlements are a legitimate business but could be abused if a whole bunch of folks start getting into it. Sort of like the whole thing that has happened with subprime mortgages,” Kirby said. “Next session, we’ll pass a bill, if not this session.”
The bill draws support from insurance companies because it gives the state authority to investigate and license life-settlement providers, said Jerry Davies, spokesman for Farmers Insurance.
“We believe this isn’t the true use of life insurance,” said Colin Johnson, spokesman for Bellevue-based Symetra Financial Corp., which sells life insurance.
The state Office of the Insurance Commissioner agrees that the business needs regulation, even if the current bill language needs to be rewritten, said spokesman Bill Ripple.
“We do support the idea of regulating this industry,” Ripple said. “We need some time to figure out what the impacts are going to be and whether this (bill) is the best way to get there.”
LIFE SETTLEMENTS
A life settlement is a transaction in which someone sells one’s own life-insurance policy to a third party. The third party then collects the benefits after the person dies.
While such transactions may be necessary, they aren’t for everyone. And some transactions are scams. Things to consider:
- If you need cash now, check to see if your existing life insurance policy has a “living benefit” option. Such options allow terminally ill policy holders to get cash benefits before dying.
- Even if you sell your old policy, it still exists, only with a different beneficiary upon your death. The existence of the policy may affect your ability to take out future policies.
- Shop around with different life settlement companies to see who will give you the best deal for your policy.
- The money you receive in return for your policy may be taxable. If the sum is large enough, it could disqualify you for Medicaid and other government programs.
- Ask brokers about their commissions.
- When you sell your policy, you are giving third parties permission to access your medical information. That’s because the closer you are to death, the more your policy is worth. The third parties, including hedge funds, may share your medical information with others. Ask whether your privacy will be protected.
Sources: Andrea James with Seattle PI, NW Insurance Council, National Association of Securities Dealers.
