Education >> Confused About Insurance?
Life Settlements: Multimillion-Dollar Incentive for Murder
by Byron Udell, AccuQuote Founder and CEO
February 2011
You own a life insurance policy. You’ve been paying premiums for years, perhaps decades. Now, you decide that you don’t need the coverage anymore. If you cancel the policy, you might not get any money back from the insurance company. Or you might get a fraction of the amount you’ve paid in premiums.
Wouldn’t it be great if you could sell that policy instead of canceling it?
Now you can. Over the past several years, a “secondary market” for life insurance has evolved, causing many consumers to inquire about something called “life settlements.” This occurs when a person who owns an insurance policy sells it to a third party, generally an investor, in exchange for a lump sum of money — usually more than the amount you’d have gotten if you had surrendered the policy or canceled it.
But is this a good thing? Let’s see...
Say you own a $500,000 policy that has a cash value of $150,000 and which costs you $10,000 per year to maintain. If you die, the beneficiary gets $500,000 — but you have to keep paying that ten grand each year. If you surrender the policy, the insurer gives you $150,000 right now. Enter the secondary market.
Shrewd investors have figured out that they can pay you $275,000 for the policy. When you die, they receive the $500,000. You win, and so do they.
When an investor buys a life insurance policy from a policyholder, especially from older policyholders who are older with health conditions, the expected rate of return can be in the double digits. In fact, most life settlement deals will not happen unless the investors expect to earn rates of return in excess of 10% per year. These investors pay a lump sum to transfer the ownership of your policy to them. At that point, if the investors expect a return, it is up to them to keep paying the premiums until the original policyholder dies. Many investors will claim that they are doing the policyholder a favor by allowing the sale of a life insurance policy for an amount higher than the policy’s surrender value.
Does this sound enticing to you as the owner of a policy you no longer need or want? There are several things to consider before entering into a life settlement transaction.
First is the fact that you’re entering into an arrangement with an investor who stands to profit upon your death. That can be a chilling proposition. As long as the policyholder is alive, the investor must continue to pay the premiums on the policy so he can eventually collect on it.
That might cost the investor tens of thousands of dollars annually. The sooner you die, the more profitable it is for the investor. In essence, the insured is walking around with a big target on his back.
Of course, no investor would agree that there is any financial motive for murder. Consider, then, the true story of a woman who drowned in her bathtub two years ago at age 74 while fully clothed. The authorities say she drowned accidentally, but the last person to see her alive was her boyfriend, a man half her age who was the beneficiary of her $15 million insurance policy — a policy that was soon to expire. Does it make you wonder?
Once you sell your policy, it can be resold again and again. Some policyholders have no control over whose hands it falls into, and there is little you can do to prevent the policy from falling into the wrong hands. As the number of policies that fall into the hands of people with no insurable interest increases, might nefarious events occur? I predict that they will.
Every state has laws prohibiting the purchase of a life insurance policy by someone who has no insurable interest in the insured’s life. It is against public policy to speculate on human life, for very good reasons. However, a person has the right to purchase a policy on their own life and sell it to an investor.
There is another important perspective to consider. There have been hundreds of millions of dollars raised in funds designed to acquire existing life insurance policies, typically for more than policyholders have paid into them. These investment funds are prepared to pay the premiums until those who are insured die. Unlike with individuals who die with their own policies, these funds and/ or investors have to pay ordinary income tax on the gain. This is the difference between the death benefit they ultimately receive and their basis (the money they paid for the policy including all premiums). Even after losing a third of their gain or more in income taxes, investors still look forward to the return. Had the insured kept the policy, their beneficiaries receive the same returns free of income tax.
Bottom line: Stranger-originated life insurance is a bad idea. Life insurance should never be regarded as an investment; it is something you buy to protect your family or estate’s financial interests in the event of death.
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