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Life Health > Life Insurance

Throw The Baby Out With The Bathwater

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Articles that I have previously written in this space make it quite clear that I view the whole subject area of “life settlements” with great apprehension. So it should come as no surprise that I read the recent supplement of the National Underwriter on life settlements with some skepticism. The central part of the supplement was a roundtable discussion by 11 leaders of the life settlements business, which was hosted by Ramiro Rencurrell, president of the Life Insurance Settlement Association, and Steve Piontek, Editor-in-Chief of National Underwriter.

I commend the hosts for sponsoring this meeting and airing the views of this newest segment of our business. However, feeding my skepticism of this whole endeavor was my recollection of 3 other similar roundtable discussions in which I was a participant.

About 30 years ago one of the hottest financial products being sold was commodity options. You could buy options on everything from pistachio nuts to silver–with silver being one of the favorites. Huge profits were being projected, but because there was little substance to support the projections, the Better Business Bureau issued a very negative report on the practice.

Major purveyors of these options in our area cried “foul” and asked for a meeting to plead their case. I was president of our local BBB at the time and agreed to host the discussion. The meeting was incredible in its sense of wishful thinking by the sellers. Two men from the Arizona Attorney General’s office were also in attendance and the following day, based on what they heard at the meeting, shut all of the operations down.

Sometime later, single premium policies were being hawked as the last great “tax shelter.” Millard Humphrey, then Arizona Director of Insurance, invited me to sit in on a meeting of domestic companies that were making a particularly egregious type of this product. After a full day of listening to their arguments justifying the product, Humphrey shut all of them down. This debate was waged at the national level as well, and resulted in punitive legislation that we live with today.

While I was at the National Association of Life Underwriters, I hosted another such discussion where those marketing a variety of products generally described as “janitor insurance” tried to plead their case. They failed and major steps to clean up corporate-owned life insurance ensued.

The life settlements discussion covered by the NU supplement struck me as being intellectually a cut above some of the discussions cited from my own experiences. However, the overall objective seemed to be the same: justifying the marketing of the product (or service) and opposing restrictive legislation. Unfortunately, baddies have also invaded the field of life settlements similar to those who screwed up the marketplace involving the products mentioned earlier. The panel acknowledged that it was such abuses that were driving legislative proposals that would, in their words, “throw the baby out with the bathwater.”

I have written previously about the flagrant abuses, such as non-recourse financing and the fundraising scheme by the University of Nebraska Alumni Association, so I will not dwell on that again. It was clear, though, that this panel was aware of the ways that life settlements were exploiting the use of life insurance, but it was not clear to me the extent to which any of the panelists were themselves engaged in the practices. Their opposition to legislation requiring a 5-year waiting period before a policy could be “sold” leads me to suspect that at least some of the panelists may be engaged in some of the offensive practices. I was underwhelmed by their arguments opposing the 5-year waiting period.

What seems to be missing in this discussion is the special nature of the life insurance product and its linkage to human life values. Because of the intimate relationship between life insurance and the indemnification for the loss of a human life, the product is afforded special considerations under the law and in society. None of these accommodations have arisen for the purpose of enriching institutional investors or hedge funds. In fact, one of the most important benefits, the tax-free death benefit, has been taken away for the express purpose of discouraging the trafficking in policies insuring human lives, which was deemed socially undesirable.

Aside from the well-known tax advantages, life insurance has other considerations under the law. To varying degrees, both the cash values and death benefits are exempt from creditors’ claims. In most jurisdictions, all or part of the values are exempt from creditors, even in bankruptcy proceedings. How can you continue to justify exempting an asset that under a life settlement can be sold at a profit to the highest bidder?

We frequently hear the lament “government is always sticking its nose into our business and our associations, charged with protecting us, merely reacting.” Nonsense. Government reacts to us and what we are doing. When we push the envelope–government reacts.

Panelists agreed the settlement market is now very small, but will grow significantly in future years. If so, government will surely react and put at risk the benefits life insurance brings to the majority of policyholders.

So I say to the regulators now: Hang tough. This baby should go out with the bathwater.


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