Betty White raps for life settlements: seniors beware

Nationwide suspended underwriting on coverage over $1,000,000 for one of the universal life (UL) products due to “improper use”.   Nationwide did not elaborate, but this could be due to stranger-originated life insurance which prompted a similar restriction in 2010 sales for individuals over 65 with face amounts over $100,000.

Looking into what’s new in the dubiously ethical world of investors buying life insurance policies, it was a surprise to see that Betty White has clocked over 1 million views with a video pitching life settlements.

I wonder what her late husband Alan Ludden would have thought.  Betty White’s video opens at the Los Angeles Zoo.  A walkway there is named in Ludden’s memory.  As a  kid in the 1960’s,  I developed a good deal of respect for his intelligence and warmth watching him host the G.E. College Bowl and Password.

Policy holders considering a life settlement should be aware of all their options to maintain their coverage for their beneficiaries.  Not all of those options might be given by a life settlement agent, called a viatical settlement provider.  This article by JJ MacNab gives a good overview.  Viatical settlements requires a separate license for agents.  To make sure of an objective overview, ask a life insurance agent that is not licensed for life settlements for options to retain or replace coverage.  Ultimately, find an agent that holds a high standard in maintaining their fiduciary responsibility to advise and act in the policy holder’s best interest.

Here are some alternatives to selling your life policy:

Borrow from the cash value to pay premiums

Accelerate a portion of the Death Benefit  (if terminally ill)

Replace the coverage and either taking out the cash surrender value or roll it over in with a 1035 exchange

Beneficiaries taking over ownership and making premium payments.

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Life Settlement: seniors watch out

I wrote in this blog about stranger-originated life insurance this Monday, and the next day Imperial Holdings, Inc., a company in the life insurance settlement business, had its headquarters in Boca Raton, Florida raided by the FBI.  No charges have been filed.  Life Partners, Inc., is another company in the settlement business, is also under investigation. Allegations for Life Partners focus on misrepresentations to their investors.

Regardless, seniors interested in a life settlement need to be wary of the life settlement industry.  Finra investors provides an excellent overview of the issues involved.

Make sure to contact an independent agent to review all your options before signing over ownership of your policy.  Ask your company for an in force illustration.   Explore options such as: Continue reading “Life Settlement: seniors watch out”

Ruling to contest Stranger-Originated Life Insurance: dead pools precedent

Bloomberg reports on a Delaware court ruling which opens an avenue to curb stranger-originated life insurance. Life companies now can contest the owner’s insurable interest even after the standard two year contestability period.

Normally, life insurance implies an insurable interest.   A wife who depends on her husband’s income has an insurable interest,  if he dies.   Two business partners who depend upon each other to run a company have an insurable interest.  Normally, insurable interest and an income to benefit ratio keeps everything in line.  The whole concept is to cover a loss, not to make a profit.  For example, a man makes $50k a year.  His wife takes out a $500k life insurance policy, 10 times his income, and sleeps better at night knowing the her and the children will be able to replace his lost income if he dies.

But investors, strangers with no insurable interest, have also gotten involved with life insurance seeking profits.  Let’s take, for example, an investors finding a 72 year old man in average health, and convince him to take out a $1 million dollar policy on his life by paying him a lump sum to transfer ownership.  Age 72, male, standard non tobacco premiums on a guaranteed UL are currently $38,415 a year.   Best health rates are $28,346 a year, but in the logic of this type of deal, it’s better to find someone less healthy; they don’t live as long.  Investors pay the premiums and collect the $1 million when the insured dies.  This is called stranger owner life insurance or SOLI for short.  The practice has an unsavory history.

By the mid-18th century, purchasing policies on strangers had become a popular form of gambling. Investors often placed their money into “dead pools” insuring the lives of well-known public figures, particularly those with such problems as gout or alcoholism, or those who were likely to be challenged by political enemies and engaged in duels. Such “investors” would often offer targeted insureds lavish dinners and “a drink or two on me”–or would use other means to assure the certainty and accelerate the realization of their investment.

How much of an impact this court ruling will have depends on how broad an interpretation is for the term “stranger-originated”.   Typically, the insured is initially the owner, and then assigns ownership to a stranger a short time after policy issue.   Application now have specific questions about intent of the policy to be assigned, so transfers of ownership will be looked upon closely for more traditional insurable interest.

Reversing ground on stranger owner life insurance is good news.  Speculating on someone’s death is bound to lead to abuses, and speculation on life insurance, where policies are issued regardless of need, runs up the cost for the legitimate consumer.

Life Settlements

A recent article about selling your life insurance policy advises you to interview at least three brokers.   Here’s more insight into what to look for in a broker.

  • A broker with a strong sense of ethics to act in your best interest.   After all the life insurance was intended for your beneficiaries, have all the avenues been explored to save the policy?   You need a broker to review your policy, best by obtaining an “in force illustration”, and provide a range of alternative recommendations.  Can the cash value in your policy be used to pay all or part of your premium?   Can you replace your policy and use the cash value to lower your premiums or pay up a policy?   This is called a 1035 exchange.   Is there an accelerated death benefit to tap into?

Continue reading “Life Settlements”