Life settlement (selling policy) quesitonGo to Top
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?
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.
------------------------------------
Send me a PM to find out how life settlements can help your clients! [COLOR=red][/COLOR]
[COLOR=blue]"Do your duty in all things. You cannot do more, you should never wish to do less" ~~Robert E Lee[/COLOR]
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.
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.
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.
------------------------------------
I thought this WAS a real job!
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.
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.
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.
------------------------------------
[COLOR=#000066]"Tell me and I will forget. Show me and I will remember. Involve me and I will understand." Confucius
Once it is sold to a third party the insurable interest that the owner has on himself is gone
Insurable interest has nothing to do with who owns the policy. It is the beneficial interest that must be established with the issuing carrier at time of underwriting. Once the policy is issued the beneficiary can be changed to anyone, even Tony Soprano, and the carrier cannot do anything about it.
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?
A 30% discount would indicate death is almost certain to happen any day now.
Generally the policies are sold at a 50% or much greater discount.
Insurable interest is no longer the issue but transfer for value rules do apply.
The life insurance lobbyists will crush the fledgling life settlement folks.
Many policies sold for investment purposes are sold to carriers. I see no reason why the life insurance industry will want to fight the life settlement industry.
Many policies sold for investment purposes are sold to carriers. I see no reason why the life insurance industry will want to fight the life settlement industry.
If a carrier buys the policies of a another carrier, in aggregate they cannabalize them and mess up their margins by keeping policies in force (resulting in payout) that would otherwise lapse. Soooo, they have to get in the game themselves in order to particpate in the plunder and offset their losses. I don't think there is any love between the life insurance industry and the life settlement industry even though the carriers may have to participate in the game to survive as long as it is legal.
Carriers mostly buy policies issued by their own company but they will also buy other carriers plans. AIG is a major player in that market.
The life settlement industry involves such a small number of policies that it is highly unlikely it will ever have any noticeable impact on loss ratio's.
The life settlement industry involves such a small number of policies that it is highly unlikely it will ever have any noticeable impact on loss ratio's.
That is only true if we assume that there will be no significant growth in the industry, yet the industry is growing and the life settlement folks have to gear up to deal with the opposition from carriers. Consider the comments below from a *life settlement* groups newsletter:
Winter
Now, in a faint echo of those times, a secondary market in life-insurance policies is growing rapidly in the United States.
However, the life-settlement business still has to overcome several In addition, some life insurers see the life-settlement business as a direct threat. Should the secondary market expand, the proportion of policies that lapse—and on which insurers pay no claims—would drop. Insurers would then have to pay more out. Their profits would fall and premiums would probably rise. So a handful of lifeinsurance firms are trying to hamper the life-settlement firms' growth by prohibiting their insurance agents from discussing them with clients and by making policies nontransferable.
A 30% discount would indicate death is almost certain to happen any day now.
Generally the policies are sold at a 50% or much greater discount.
A life settlement is generally for 20-60% of the face value. This is all dependent on the LE of the client and the premiums. The funders are looking for a ROI of 9-13%
Carriers mostly buy policies issued by their own company but they will also buy other carriers plans. AIG is a major player in that market.
The life settlement industry involves such a small number of policies that it is highly unlikely it will ever have any noticeable impact on loss ratio's.
AIG owns a piece of Coventry. They have gotten into some trouble lately for unethical actions. While Coventry has a heavy influence from AIG, they will buy a policy from any carrier. Peachtree is also partially owned by a carrier. Remeber before working with a company, find out if they are a private funder or broker.
The life settlement industry is growing rapidly. Three years ago 5 billion worth of policies were settled on, the next year it grew to 12 billion. Last year it grew to 23 billion and it is projected that there will be 150 billion worth of settlements done in 2007
AIG owns a piece of Coventry. They have gotten into some trouble lately for unethical actions. While Coventry has a heavy influence from AIG, they will buy a policy from any carrier. Peachtree is also partially owned by a carrier. Remeber before working with a company, find out if they are a private funder or broker.
Which one is Coventry. A private funder? How do the brokers work it? The shop it around to the private funders or what. How does all that work.
Which one is Coventry. A private funder? How do the brokers work it? The shop it around to the private funders or what. How does all that work.
Winter
Yes Coventry is a private funder. Private funders have investers (both individuals and corporations) that put the money up to buy policies. These private funders want to get each policy for the smallest settlement possible to gain the largest profit in the end. Brokers work with a network of funders. The bigger brokres do not work with individual investors, but large financial institutions and hedge funds. A broker will shop each policy out and get the largest settlement possible. The broker makes a percentage of the settlement, so the more they can get a client, the more they make.
Re: Life settlement (selling policy) quesitonGo to Top
Originally Posted by al3
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, in a nutshell:
The concept of life insurance as property, capable of being transferred for value, was established via U.S. Supreme Court Grigsby v. Russell, 222 U.S. 149 (1911) .
Justice Oliver Wendell Holmes outlined the case as follows:
“The material facts are that after he had paid two premiums and a third was overdue, Burchard, being in want and needing money for a surgical operation, asked Dr. Grigsby to buy the policy, and sold it to him in consideration of $100 and Grigsby's undertaking to pay the premiums due or to become due; and that Grigsby had no interest in the life of the assured.”
Importantly, the Court went on to Order that
“…life insurance has become in our days one of the best recognized forms of investment and self-compelled saving. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property.”
Thus was enshrined the principle that a life insurance policy, for due consideration, may be sold by the owner to a third-party having no “insurable interest” in the life of the insured.
Life settlement (selling policy) quesiton
Linear Mode
