Older Americans increasingly being targeted by speculators benefiting from life insurance purchases
May 30, 2006
BLOOMINGTON, Ind. -- Eight years ago Joseph Belth learned of an amazing offer. A certified public accountant in Florida wrote to a 79-year-old widow in Pennsylvania and asked her to take out a life insurance policy with a $1 million death benefit. She would sell the policy immediately to investors, who in exchange would pay her $50,000 in cash. No money would ever come out of her pocket because all premiums would be paid by the investors.
Last year Belth learned of a similar letter from an attorney to another elderly person. This time, the elderly person would have to wait two years to be paid, and the arrangements were more complicated.
Both are examples of what Belth, professor emeritus of insurance at Indiana University's Kelley School of Business, calls "speculator-initiated life insurance," or "SPINLIFE."
"In recent years, speculation in human lives includes the bribing of wealthy, elderly individuals to apply for large policies destined for purchase by speculators," said Belth, who is also the publisher of the respected newsletter
Belth devotes the June issue of his newsletter to the topic and provided testimony about it at a hearing on May 3 of the Life Insurance and Annuities Committee of the National Association of Insurance Commissioners.
"Life insurance is important. Among its purposes are to protect the families of breadwinners, create estates, preserve estates and fund business continuation agreements," he said. "Its conversion into a commodity that is used to speculate in human lives threatens the survival of life insurance companies as viable financial institutions."
For much of the 20th century, rumors persisted about a speculative market for life insurance policies. In 1989, a private for-profit corporation launched the modern speculative market for life insurance in the United States. The firm began buying relatively small life insurance policies from the terminally ill. Within 10 years the market had expanded to include the purchase of large policies issued to people whose health was impaired but who were not terminally ill.
Typically once an insurance policy has been sold to another party, it can be resold over and over, he noted. Most state statutes and case law restrict life insurance companies from issuing policies to people with no genuine, insurable interest in the life of the person being insured. "However, an insurable interest is not required when the ownership of an existing policy is changed," Belth said.
"It is important to determine whether secondary market firms are in the insurance business, or if not, what business they are in. The courts thus far have said the firms are not in the insurance business but have not said what business the firms are in," he said. "Based on those rulings, the states lack the authority to regulate the secondary market. State laws and regulations relating to the secondary market are built on sand ... What is needed now is federal legislation stating where the secondary market for life insurance should be regulated."
According to Belth some life insurance companies have taken or are considering actions to prevent use of their policies in SPINLIFE transactions. To make the transactions impractical they are sponsoring congressional legislation that would place a heavy excise tax on certain ownership changes. "That is ill-advised," he said. "It's difficult to draft language that would cover all variations of speculative ownership changes and avoid covering at least some routine ownership changes."
Other steps some companies may seek include asking state lawmakers to weaken or abolish the incontestability clause. That provision prohibits insurance companies from revoking coverage because of alleged misstatements by the insured after a specified period, usually about two years. Belth argues against this because it would allow insurance companies to deny many death claims routinely.
Belth said other, fundamental steps could be taken. They include companies adding questions in their application forms about the insured's plans for the policy. The company should impose restrictions on how changes are made in a policy's ownership and beneficiaries. He also thinks life insurance agents should not be allowed to use their licenses to operate in the secondary market.
"Promoters of SPINLIFE transactions say all the parties are winners. That's nonsense," he said. "The only sure winners are the promoters who are paid up front. The other parties are potential losers ... In my opinion, the growth is driven by pure, unadulterated greed. The promoters will be gone from the scene when the consequences of their activities are felt by the victims they leave behind."