Years ago, we used to sell a type of policy called Single Premium Whole Life (SPWL). It was an interesting product, used primarily for estate planning, with some amazing tax benefits built in. The guaranteed, tax-free nature of the cash build-up was also attractive to investor types, who ultimately sold many more of these plans to their clients than we "regular" insurance guys ever did. So much so, in fact, that SPWL went from "outstanding but limited purpose" life insurance plan to "abused tax shelter," and gave us terms like TAMRA and MEC (but that's another post).
Once again, the folks that insist on conflating a risk management tool (life insurance) with pie-in-the-sky investment schemes have managed to screw up another useful insurance product, but this time the result may be even worse. As we've noted here time and again, Stranger Owned Life Insurance can be a helpful way for folks to take care of, say, business continuation and charitable bequests (to name just two). Unfortunately, they can also be used for illegal purposes (like, say, murder) and risky fast-buck investment schemes.
It's that latter that now threatens the very nature of how life insurance may be bought - and owned - from now on. Life insurance, especially the permanent variety (eg whole and universal life) have always been considered property, much like owning a home. The cash value is exactly the same as equity, with a fixed cost and specific tax benefits.
But there are also rules about how these are applied.
First, we need to address the concept of "insurable interest." This phrase has taken on a lot of new connotations of late, but it is (or at least should be) relevant only at the point of initial sale. That is, someone (and this could be a person, organization or business) must risk a demonstrable loss were one to pass away. Typically, this would be a spouse or business partner, perhaps one's alma mater, that kind of thing. When AIDS was making front page news, a lot of folks looked to sell their life insurance policies to fund treatment or lifestyle enhancements (i.e. viaticals). All of these uses have some benefit to society as a whole.
As the real estate and stock markets have tanked over the recent past, sophisticated financial vehicles like hedge funds began looking for "alternatives." And they found one:
"In a frenzy that bears some similarities to the subprime-mortgage debacle, billions of dollars of stranger-originated life insurance was sold to senior citizens between 2004 and 2008 with the intention of selling the policies to investors. The investors thought they spotted an opportunity in policies that seemed underpriced; some funds accumulated hundreds of such policies."
This wasn't just seniors selling decades-old policies, but agents targeting a potentially lucrative - but vulnerable - niche. Some agents made literally millions of dollars enticing (cajoling?) seniors and others to buy life insurance policies which were then sold to these investor groups. The abuse really grew from two practices:
The first is that many insurance companies really didn't practice aggressive, thorough financial underwriting, instead focusing primarily (perhaps exclusively) on the health of the proposed insured. The second was that agents knew this, and often engaged in blatant misrepresentation:
"... Ohio regulators revoked the license of an agent who allegedly promised a 74-year-old Cleveland woman $8,000 to let him take out $9 million of insurance on her life. The application to Prudential Financial Inc. indicated she had a net worth of $12.5 million. In reality, she and her husband had a net worth of just $2,000 and combined monthly income of $950 ..."
One could argue that the carriers should have been more diligent, but it seems to me that these agents were clever (and motivated) enough to dodge mist obstacles that might be thrown in their way. And of course the funds (investors) didn't care: as long as the policy was past the two year "contestability period" they had no reason to be concerned. Now, of course, carriers are fighting back, arguing that this practice interferes with their risk evaluation methods, and in fact should void the contract outright.
Are they right?
Well, at least a few state Departments of Insurance think so, and are moving against the agents who arranged the sales, and who thought that forging insureds' signatures (for example) was a legitimate way to "move product." The end result may be a redefining of "insurable interest" (and not for the better), and new bureaucratic "safeguards" that make buying life insurance even more onerous.
Once again, the folks that insist on conflating a risk management tool (life insurance) with pie-in-the-sky investment schemes have managed to screw up another useful insurance product, but this time the result may be even worse. As we've noted here time and again, Stranger Owned Life Insurance can be a helpful way for folks to take care of, say, business continuation and charitable bequests (to name just two). Unfortunately, they can also be used for illegal purposes (like, say, murder) and risky fast-buck investment schemes.
It's that latter that now threatens the very nature of how life insurance may be bought - and owned - from now on. Life insurance, especially the permanent variety (eg whole and universal life) have always been considered property, much like owning a home. The cash value is exactly the same as equity, with a fixed cost and specific tax benefits.
But there are also rules about how these are applied.
First, we need to address the concept of "insurable interest." This phrase has taken on a lot of new connotations of late, but it is (or at least should be) relevant only at the point of initial sale. That is, someone (and this could be a person, organization or business) must risk a demonstrable loss were one to pass away. Typically, this would be a spouse or business partner, perhaps one's alma mater, that kind of thing. When AIDS was making front page news, a lot of folks looked to sell their life insurance policies to fund treatment or lifestyle enhancements (i.e. viaticals). All of these uses have some benefit to society as a whole.
As the real estate and stock markets have tanked over the recent past, sophisticated financial vehicles like hedge funds began looking for "alternatives." And they found one:
"In a frenzy that bears some similarities to the subprime-mortgage debacle, billions of dollars of stranger-originated life insurance was sold to senior citizens between 2004 and 2008 with the intention of selling the policies to investors. The investors thought they spotted an opportunity in policies that seemed underpriced; some funds accumulated hundreds of such policies."
This wasn't just seniors selling decades-old policies, but agents targeting a potentially lucrative - but vulnerable - niche. Some agents made literally millions of dollars enticing (cajoling?) seniors and others to buy life insurance policies which were then sold to these investor groups. The abuse really grew from two practices:
The first is that many insurance companies really didn't practice aggressive, thorough financial underwriting, instead focusing primarily (perhaps exclusively) on the health of the proposed insured. The second was that agents knew this, and often engaged in blatant misrepresentation:
"... Ohio regulators revoked the license of an agent who allegedly promised a 74-year-old Cleveland woman $8,000 to let him take out $9 million of insurance on her life. The application to Prudential Financial Inc. indicated she had a net worth of $12.5 million. In reality, she and her husband had a net worth of just $2,000 and combined monthly income of $950 ..."
One could argue that the carriers should have been more diligent, but it seems to me that these agents were clever (and motivated) enough to dodge mist obstacles that might be thrown in their way. And of course the funds (investors) didn't care: as long as the policy was past the two year "contestability period" they had no reason to be concerned. Now, of course, carriers are fighting back, arguing that this practice interferes with their risk evaluation methods, and in fact should void the contract outright.
Are they right?
Well, at least a few state Departments of Insurance think so, and are moving against the agents who arranged the sales, and who thought that forging insureds' signatures (for example) was a legitimate way to "move product." The end result may be a redefining of "insurable interest" (and not for the better), and new bureaucratic "safeguards" that make buying life insurance even more onerous.
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