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AIDS Begat Viaticals. Viaticals Begat Life Settlements...

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…And life settlements continue to beget trouble for our business. When the AIDS epidemic started to affect substantial numbers of Americans, there was an outpouring of sympathy and compassion for the economic plight the disease created for some. In particular, many had life insurance policies that would likely soon result in a death claim, but the insureds, being deprived of earnings, could not afford to maintain them. Moreover, their expenses rose because of the cost of medical care and related expenses.

The answer to many: a viatical arrangement for their policies. Under this plan, policies would be sold to an investor who, because of the poor health of the insured, would soon collect the death benefit. Because death in most instances was expected within six months, the sales price for such policies was quite high and much needed funds would flow to the insured. The arrangement prevented the loss of policy benefits to the insured’s beneficiary while at the same time freed up funds for use today.

Viaticals were regarded as a humane way of dealing with an unfortunate economic problem. Many companies introduced an “accelerated benefits” provision at about the same time, thereby lessening the need for the viatical option.

But then the viatical arrangement for terminally ill people began to morph into “life settlements”–first on policies that had been in force for many years and then more recently on new policies purchased expressly for this market. Since their introduction it seems that almost every day brings a new use of this device and, in my view, they are brought to us by people who do not give a rap about our business and its future. The lure of a fast buck blinds them to the danger they pose to the future viability of our products.

The latest wrinkle of life settlements (or stranger-owned life insurance) to come to my attention is the “Five Star Program” offered by the Nebraska Alumni Association. According to its literature, the program is specifically for individuals who meet the following criteria:

–ages 75 to 85;

–in generally good health;

–a net worth of at least $1 million;

–are comfortable with their estate plan; and

–have a relationship with the Nebraska Alumni Association.

“The Nebraska Alumni Association will purchase a life insurance policy on individuals willing to participate and will be the owner, premium payor and beneficiary of that policy. Once the policy has been issued, the Nebraska Alumni Association may sell it and receive the proceeds of that sale in cash.

“For example, if a $1 million policy was written and the premium paid was $10,000, the net gain to the Nebraska Alumni Association, if the policy was sold for $100,000, would be $90,000.

The literature goes on to point out what happens if the policy is not sold within 30 days. “If the policy is not sold, the first month’s premium will be returned to the Alumni Association and the policy will become void. Or, the Association may wish to keep the policy and continue to pay the premium.”

It is hard for me to believe that any life insurance company would knowingly participate in Nebraska’s Five Star Program given the obvious anti-selection factors and insurable interest issues it raises.

The trafficking of insurance policies on the lives of human beings has for more than 100 years been repugnant to public policy. Laws requiring an “insurable interest” in the insured were enacted to prohibit overt abuse of the life insurance product. The “transfer for value” rule was enacted to make the sale of a policy less attractive to an investor. So far, regulators and lawmakers have tried to deal with this problem in a manner that does not destroy legitimate property rights inherent in a life insurance policy. I am not overly confident that such forbearance will continue into the future as more and more speculative uses of life settlements are introduced.

The example the Nebraska people use–where one premium payment of $10,000 on a $1 million dollar policy overnight creates a marketable policy worth $100,000–blows my mind. If this is true, then why wouldn’t any individual do likewise? Buy such a policy on his/her life, pay one month’s premium and then reap a $90,000 gain by selling it to an investor. Sounds like flimflam to me.

If the policy sale takes place within 30 days, then the contestable period is fully operational, and it seems to me any company that unknowingly became a party to this scheme would void the contract.

An alumni association clearly has an insurable interest in its members. Also, I am sure that most people are comfortable with the idea of their association owning a policy on their life. However, I do not believe the many people, if aware of the facts, would be happy with the idea of their association selling their policy to a stranger whose only interest is your early demise to maximize their profit.

If the Nebraska Alumni Association persists in its Five Star Program, I believe that, in the long run, it will produce more red faces for “Big Red” than profit.


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