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Vol 7 No 6
November 2005


Katt & Company is a national fee-only life insurance advising firm. The June 2002 Forbes magazine, and a July 16, 2003 Wall Street Journal article, name Peter Katt as one of only four nationally recognized advisors. The Forbes article states that, "…advisers are well worth the money… These savants are working for no one but you…" For references please contact us.

Because transactions associated with the sale and purchase (via life settlements) of life insurance can pay insurance agents enormous but hidden (from consumers) commissions, life insurance is a favored financial asset for a variety of deals that have nothing to do with the purpose of life insurance.

Our November 2004 Perspectives, Marketing Death-Futures Life Insurance, detailed the hustling of wealthy elders into becoming insureds for a death futures scheme, which is the intersection for premium financing and life settlements. This activity has gotten more reckless in the past year. This Perspectives provides an update on such matters.

  • The transaction detailed in the November 2004 Perspectives, Marketing Death-Futures Life Insurance, has been jazzed up with the payment of bonuses to the wealthy seniors willing to be insureds. Bonuses of 2% to 3% of the amount of insurance being purchased are paid. We reviewed one case where life insurance in the amount of $25,000,000 was proposed with a $500,000 bonus to be paid to the insured. We suspect there are a myriad of tax implications not disclosed for the transactions proposed, to say nothing of the potential risks to insureds' lives from anxious investors.

    Hal, 76, found that his wealth preservation firm (sic) had misrepresented, to him and six insurance companies, the reasons for six applications for $5,000,000 policies to each company. It was represented that the insurance applied for would replace $10,000,000 existing insurance and that six applications were being submitted in order to obtain the best underwriting results. (Hal's net worth is $10,000,000, making it impossible to obtain an additional $30,000,000 without this deceit). In fact, all six policies were put in force with the payment of premiums from a partnership the agent had put together that owned these policies. Hal didn't even know that these policies were in force for two years. Their existence was finally revealed because the agent needed him to sign documents in order to sell them, which was the reason for putting them in force in the first place. Hal refused, worried about who the ultimate investors would be. The agent sued Hal attempting to collect some $4,000,000 the agent had paid in premiums.

  • Life settlement / premium finance firms all promise insureds that no individual investors will ever know the insureds' identities. I am suspicious this is a promise not always kept by all such firms. Last year working with a San Diego client on an entirely different matter he asked me about investing in life insurance policies because he had been approached to do so. He sent me information presented to him that included three life insurance policies he could invest in. Each included: the name of the insured; insurance company; fact amount; premium; life expectancy; and various investment yields an investor could expect that included around 120% based on the early death of the insured.

    Although it would take significant undercover surveillance for an extended period of time to know exactly what is going in the life settlement world, my instincts suggest that it can be separated into three categories. One category is comprised of the premiere life settlement firm, Coventry First, that buys policies for its own account or, under a traveling covenant, can resell policies to institutional buyers who are forever prevented from revealing any identifying information about insureds to individual investors. I would be comfortable having a client consider selling policies to Coventry First. A second category is comprised of established firms. It is my best information that these second tier life settlement firms primarily use institutional monies, but also put together ad hoc deals with investors that come to them. It is my best information that these second tier firms do not have traveling covenants regarding an absolute prohibition of ever allowing subsequent individual investor knowing the identities of insureds. I have less confidence in these second tier firms. There is another category of third tier firms that I believe come into and out of the life settlement marketplace that might be considered fringe players. Because there appears to be little useful regulation of the life settlement business, this alone causes me to be more cautious of the third tier players. Some clients may only be comfortable selling policies to Coventry First, even if the price is lower.

  • Jim, 71, called from Florida asking if there was a problem with inflating his net worth when applying for life insurance. An agent had solicited him to become the insured for a large policy but Jim's $10,000,000 net worth wasn't enough to justify the size of the policy so the agent told him to claim a net worth of $15,000,000, something a good friend of Jim's had done - and the source of Jim having met the agent. Jim's motivation was the promise of a $200,000 bonus.

  • The director of insurance for a national investment firm "A" informed me they had been contacted by an investment advisor (sic) asking them to invest in the purchase of VUL policies on the lives of some 100 parishioners willing to donate their lives to enhance the investment return of a church foundation. Investment firm "A" and several large life insurance companies / investment firms were listed as corporate providers for this scheme. My acquaintance knew his firm ("A") was not involved and he contacted two of the others and was authoritatively informed they not only were not corporate providers but showed the hustler the door when he had called on them.

Finally, a useful tip for evaluating whether a client should sell their policy in the life settlement market:

We contributed this sample case study for the October 31 BusinessWeek story "Wanted: Your Life Insurance" that focused on Bob, 72. Bob, who has had significant heart disease during the past decade, purchased a $1,000,000 universal life policy at age 52. His agent wanted him to sell his policy having cash surrender values of $100,000 for $175,000 to a life settlement firm. But our calculations indicated that Bob could hang on to the policy for another five years (Bob has a life expectancy of eight years) without paying any further premiums and sell it to a life settlement firm for around $475,000 in five years. This price is possible because Bob's life expectancy would then be around three years. By hanging on to the policy there is about a 30% probability Bob will die during this five years, with his family getting the full benefit of the $1,000,000 policy. If Bob survives and the life settlement business still exists, he should be able to sell the policy for about $475,000. Bob's risk is that the life settlement business is gone - most likely because of government regulations.



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