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Selling off your life insurance may be a bad policy
Thursday, November 29, 2007
Anita Huslin, The Washington Post

The deal the broker discussed with his well-heeled client seemed like a good idea: Buy a $10 million life insurance policy, and if the client wanted to raise some cash, the broker could sell the policy to an investor for a tidy profit.

So the client took advantage of the offer. The broker resold the $10 million policy later that year, yielding a $550,000 windfall for the client.

The investors who bought the policies, who remain unidentified, took over payment of the premiums and became the new beneficiaries. The client followed up that transaction by selling a second $5 million policy on his life, earning $850,000. Another unknown investor became the beneficiary.



MICHAEL HOGUE/DMN

Then the client had second thoughts. In a lawsuit, he claimed he was not fully apprised of the ramifications of what he was doing. Further, he contended that the broker failed to tell him that the new policies, now in an outsider's hands, would significantly reduce his ability to buy additional life insurance.

The client, CNN talk show host Larry King, thus became the subject of a cautionary tale in what insurance regulators say is a quietly but rapidly booming trend among wealthy Americans: selling one's life insurance to strangers.

Patchwork of info

Comprehensive data on the secondary market for insurance policy sales is incomplete, in part because states regulate the industry and do not collect information uniformly. But industry analysts suggest that if the pace of life insurance policy resales over the past several years is any indication, the $30 billion that traded hands last year could easily grow to more than $150 billion over the next decade.

"The lure of easy money is seducing participants into the secondary market for life insurance and putting life insurers in compromising positions," Fitch Ratings said in a special report in September. "The flow of capital to date and the potential for this market have created a gold rush atmosphere, increasing risks for all involved."

Improprieties alleged

In Larry King's case, the talk show host alleges that Bethesda, Md., insurance broker Alan Meltzer did not properly review the tax implications for Mr. King if he sold the policies. The suit claims that Mr. Meltzer did not disclose the full amount of commissions, fees and payments he received, nor did he act in good faith to find prospective purchasers who would pay a higher price. The broker also did not properly advise Mr. King on whether he would have been better off keeping the new policies and selling older ones, the suit claims.

Mr. Meltzer, through his office, declined to comment. He denied the accusations in a response to Mr. King's suit, filed in California. Mr. Meltzer contends in the response that Mr. King was "very interested in selling his insurance on the marketplace at a substantial profit. This is what happened."

The broker also alleges that "Larry King pretends that he was interested in purchasing additional life insurance. ... During each of the transactions complained of, [we] expressly told Larry King's advisers that Larry King was better off keeping the new insurance rather than selling."

Mr. King's attorney, Marshall Grossman, described the practice of flipping insurance policies as "an issue that has been hidden from view for too long, in part because many people who have been victimized are quite likely embarrassed and have sufficient means so that they just move on."

Bigger questions

Industrywide, there are bigger questions about the ethics and legality of brokers selling policies so they can then flip them.

"If somebody owns several million dollars of insurance on my life who I don't know ... it would make me a little nervous to know someone had an interest in having me dead quick," said Joseph Belth, editor of Insurance Forum. "Because not only do they not want to have to wait for their money, but they don't want to pay for the premiums for long."

Prohibitions against stranger-initiated life insurance date back to 16th-century England, when people would bet on whether ships and seamen would return to port. To remove overt financial incentives for a third party to take out a policy on a person and then see him dead, English courts mandated that individuals have a personal or economic interest in a person to buy insurance on him.

But the sale of insurance policies to third parties came into favor in the 1980s as a way for AIDS patients to get cash from their life insurance policies before they died. Those transactions were legal because the policies were not bought with the intent of flipping them. In recent years, however, with the number of wealthy baby boomers rising, the opportunities for brokers to make commissions on policies for them have grown.

Over the past year, at least a half-dozen states have warned consumers about predatory insurance brokers who offer to sell individuals expensive policies with the intent of turning around and selling them to third-party investors who will pay the premiums in exchange for becoming the policies' beneficiaries.

"It is not illegal for somebody to approach Larry King and say, 'There's great value in a life insurance policy and I'll loan you the money to pay for it,' " said Doug Head, executive director of the Life Insurance Settlement Association. "But if there is a prearranged agreement to sell ... or kickbacks to the policy owner to incentivize them to get into the deal, they're all illegal right now, in our view."

Corporate version

There is also a corporate version of stranger-owned life insurance policies that some in the industry would like to address. Last year, Wal-Mart Stores Inc. ran into trouble for taking out life insurance policies on employees. The company reasoned that it had an economic interest in the employees' well-being, making the policies valid.

But opponents argued that employers should not collect death benefits from workers without their knowledge. Wal-Mart paid $5.1 million – the amount it collected after employees died – to settle a class-action suit brought by the workers' estates and families.

Insurance companies generally support efforts to regulate the growing secondary market for life insurance. At least 85 percent of life insurance policies lapse or are dropped by policyholders without companies ever having made any payout, according to Mr. Head and other industry officials. Prices for policies are set with that in mind.

If more and more policies wind up in the hands of investors seeking returns, insurance companies say they may have to raise rates.

Anita Huslin, The Washington Post