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The Intersection of Premium Financing
and Life Settlements
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. Onecategory 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.
