Life settlement (selling policy) quesiton

[Guest]

Not being a 'life pro' I've always wondered about the 'insurable interest' laws. What is the rationale for these? Is it because it just sounds sleazy for someone to take a life policy out on their best friend (or maybe worst enemy) and benefit from his/her death? Are these laws based on not giving someone an incentive to take out the policy on someone and then taking 'a contract' on the person via Tony Sopranno? Are these laws an anit-crime thing?

How do the life-settlement companies (Wentworth, etc.) (plan to) get around these laws?

Al

 

[lifesettlementadvisor]

Life Settlements are given to individuals who have had the policy in force for at least two years. Since they took the policy out on themselves, they have insurable interest.

There is another type of settlement called STOLI (stranger owned life insurance). These settlements cause problems with the insurable interest laws. A STOLI occurs when an agent aproaches a senior and tells them that they are going to take out a UL on them for 3 mil. For the next 2 years the senior will have free life insurance. After the two year the agent sells the policy to a life settlement company and gives the senior 10%. These are quickly becoming illegal.

If you do decide to offer a life settlement to a client, make sure you research the life settlement firm you work with. There are two main types. Private funders and brokers. The private funders use internal money to purchase the policy. They want the lowest price for the highest return. Brokers work with a network of funders and shop the policy out to find the highest price for the policy. The broker makes a percentage of the sale, so the more they sell it for, the more money they make.

 

[Guest]

Life Settlements are given to individuals who have had the policy in force for at least two years. Since they took the policy out on themselves, they have insurable interest.

Once it is sold to a third party the insurable interest that the owner has on himself is gone. If I sell my own 100,000 term policy to you for $70,000 (the numbers I've seen most often show a 30% discount), you own the policy but what insurable interest do you have on me? Only way I can see it (IANAL... but did go to law school for about ten minutes) is to structure the payment as a LOAN... which puts me in debt, and would effect my personal credit, net-worth, liabilities etc.

There is something about life settlements that do not pass my smell test, but I can't quite put my finger on it. I need to learn more. I'd hate to get into this kind of transaction and find myself in trouble with the DOI later on.

I'm not against life settlements, I just don't see how they are legal. Personally, I'm more against the silly 'insured interest' laws... or I just don't understand those either... I don't know what I don't know... but I'm a quick study.

Al

 

[lifesettlementadvisor]

The payment would not be a loan. It is given to you in a lump sum after sitting in escrow for 15 days. Insurable interest is not an issue after a policy is sold. The courts have stated that your insurance policy is considered an asset, such as your house and car.

If you would like to get some material on life settlements, let me know.

 

[JMO Fan]

Once I buy a policy, it is my property. I am free to keep it, sell it, or use it as collateral. Life insurance law only requires that there be insurable interest at issue, not after.

 

[Winter_123]

Once I buy a policy, it is my property. I am free to keep it, sell it, or use it as collateral. Life insurance law only requires that there be insurable interest at issue, not after.

And laws change from time to time based on practices and abuses and consumer and industry outcry. I agree they are legal now but it is unlikely that life settlements will not have greater scrutiny in the coming years.

In addition to the concerns about hit men scenarios, insurance regulators established insurability requirements to eliminate the outright gambling on human lives that was beginning to take place and would have grown more if not prohibited. It was not considered to be in the public interest- like it or not. I dont think the life settlement issue was on their mind at the time but it is not inconceivable that when it is on their mind that some aspects will be more highly regulated- if not prohibited. You are pitting the life settlement industry against the life insurance industry which does not like these deals because it guarantees that they will end out paying on many policies that would have lapsed. The life insurance lobbyists will crush the fledgling life settlement folks.

Winter

Winter

 

[Sam]

Once it is sold to a third party the insurable interest that the owner has on himself is gone. If I sell my own 100,000 term policy to you for $70,000 (the numbers I've seen most often show a 30% discount), you own the policy but what insurable interest do you have on me?

The basic point of insurable interest is to prevent adverse selection.
The definition is

a lawful and substantial economic interest in having the life, health, or bodily safety of the individual insured continue, as
distinguished from an interest which would arise only by, or would
be enhanced in value by, the death, disablement or injury of the
individual insured.

Historical actuarial statistics are available to insurance companies that detail what % of policies go to claim with children as a beneficiary, with spouses, business partners, further relatives and random strangers. There is a clear statistical correlation that shows that when there is no insurable interest, the claims % goes up. There are various reasons for the increase, I think I have read a few threads about it at actuarial outpost.

As such, the lack of insurable interest makes these policies a bad deal for the companies.

On the flip side, the same reasons why such transactions are bad ones for the companies, is the reason why they are illegal. There have been too many cases where someone has died under strange circumstances, and there was a policy with no insurable interest.

Also see:
http://itsjustmoney.blogs.com/its_just_money/2006/05/two_elderly_wom.html#more
http://findarticles.com/p/articles/mi_m1571/is_n35_v13/ai_19807032

 

[JMO Fan]

Enforcement of insurable interest beyond issue would not change anyone's ability to sell his/her own policy. The law supports individual choice here. If I consent to the sale, I have implied insurable interest.

Industry outcry is much more due to lapse-supported pricing than a concern about public interest. Otherwise, sales of COLI, BOLI, and IOLI would have stopped years ago. Those sales are based upon implicit understanding that they won't lapse.

That being said, the proper forum for regulation of settlements is securities (which is how it's regulated in some states). It is clearly the sale of property for investment purposes, not an insurance transaction. That's why state insurance depts. have struggled to do anything -- it's like the fire department having a too-short ladder, leaning against the wrong building.

 

[J.R.]

I came across this link while researching life settlements.

http://www.quatloos.com/life_settlement-life_settlements.htm

Interesting reading.

 

[lifesettlementadvisor]

Here is another good bit of reading about life settlements and secondary markets in the financial world in general.

http://knowledge.wharton.upenn.edu/papers/1125.pdf