Tuesday, February 16, 2010

A Good Deal, or Another Unethical Scam?

We've written before about both variable annuities and stranger-owned life insurance (SOLI), but some enterprising (?) investor types have figured out a new twist that combines these seemingly disparate vehicles:

"Terminal Illness? $2,000 in CASH, Immediately Available." ... "He recruited dozens of terminally ill people to, in effect, serve as paid fronts for purchases of the product, variable annuities."

Here's how it (allegedly) works:

The concept behind SOLI was relatively simple: offer to buy, and pay the premiums for, someone's life insurance policy. The insured reaped a quick and easy profit, and the buyer reaped one later (when the insured died). This perhaps typifies the concept of "moral hazard," but that's another post.

In the case of variable annuities, many (most?) such contracts contain a guarantee that one (or one's beneficiaries) will receive at least the amount originally invested. While this sounds a lot like life insurance, it's really not, because - in theory - there's no underwriting.

That is, the basic qualifications are a pulse and a checkbook. And the former need not be as strong as the latter:

"Because the products are sold primarily as investments, insurers generally don't ask about the health of the "annuitant," the person whose death triggers the death benefit."

Adding insult to injury (metaphorically speaking, of course), "some don't seek information about the buyer's relationship to this annuitant."

Since it's not technically an insurance policy (although it is an insurance product), the principle of "insured interest" doesn't seem to apply.

Generally, these products are bought as long term "investments," allowing the carrier to recoup potential losses. But if the buyer is, um, not long for this world, it could mean a very short term contract. And it's essentially no-lose for the "investor": if the underlying "investment" tanks, there's the death benefit guarantee. And if it does well, well...

And of course the agent (literally) who arranged the sale makes a nice commission (7.5% or more).

What makes this even more ghoulish is that the folks pushing the idea often promote it as endorsed by a particular faith. For example, one participant (it's really difficult to call her a "victim," since she profited, as well) was dying from stomach cancer when she "saw a flier from what appeared to be a Catholic charity, says her husband, Dan. Mr. Bulpitt says the family of four was on food stamps after he quit his auto-dealership job to care for his wife." She and her family received some $8,000 for her participation.

After the annuity was issued, someone (it's not clear whom, but obviously it wasn't the Bulpitt's) dropped a cool $1 million into it. When Mrs B died a few months later, the stock market had taken a tumble, and the value of her annuity was shy $13,000, which the carrier had to pony up. The only real "loser" here, of course, was the carrier; the Bulpitt's, the agent and the mysterious buyer all made out just fine.

To some extent, this is a function of how annuities have traditionally been built. The other side of the coin is that these same carriers routinely double-dip themselves: they price their life products to penalize smokers, but don't offer their smoker annuitants extra vig for a shorter expected lifespan.

One supposes that the ones with the most to lose in this equation are the stockholders of the carriers who've been targeted.

In the event, the The National Conference of Insurance Legislators is set to discuss this latest "twist" at their upcoming confab. It will be interesting to see what, if anything, they're prepared to do about it.

Or can.
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