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Beware if buyer is betting on your death

By HELEN HUNTLEY
Published August 6, 2006

Depending on your point of view, the solicitation landing in many local mailboxes sounds too good to be true or downright creepy. If you qualify, you can get thousands of dollars by selling your "unused insurance capacity" to an investor who gets the death benefit when you die.

Senior Wealth Planning Group of McDonough, Ga., has been offering to buy this "valuable hidden asset" from local residents who are ages 72 and 86, have at least $2.5-million in assets and do not have a disqualifying health condition.

"We can give them substantial money for something they didn't know they owned and never would have utilized," says Shawn Hollman, a partner in Senior Wealth Planning.

Other companies are trying to buy policies with a face value of at least $250,000 from anyone 65 or older. If you have a policy, bad health is a plus since it means you might die sooner.

Tapping older people's unused insurance capacity is the latest wrinkle in the business of speculating on individual longevity.

It began in 1979 with the purchase of policies of people who were terminally ill, transactions known as viatical settlements. Then investors began buying policies from older people who no longer needed them, a transaction termed a senior settlement or life settlement. The most recent variation is investor-initiated life insurance, sometimes referred to as STOLI, for stranger-owned life insurance. And it's giving the life insurance industry fits.

Life insurance premiums are priced with the assumption that some policies will lapse each year as people decide they no longer need or can afford the insurance. However, investor-initiated policies are likely to be held until payoff, and many are much larger than what people would buy on their own.

If investor-generated policies continue to increase, "companies are going to start pricing products differently and costs are going to go up for average consumers," said Greg Jenner, executive vice president of the American Council of Life Insurers. But he said the industry's main objection is broader:"It's against public policy to have people gambling on other people's lives."

Florida and many other states require people taking out life insurance policies to have an "insurable interest." That means the policyholder has to be someone, such as a spouse or business partner, who benefits from the insured person staying alive.

However, investors are finding ways around the law. Hollman says the investors he works with do not live in Florida and don't think they are bound by Florida law. They take out the policies directly. Other companies in this business lend a person money to take out a policy, which then is transferred to the investor after two years.

There's no question that selling an existing policy you don't need or allowing a policy to be taken out on your life can be a financial windfall. Just how much of a windfall varies with your age, health and the company giving the quote. You can get an idea of how much an existing policy might be worth at the Web site www.policysettlement.com.

The primary drawback of these deals is sharing your personal financial and health information with a stranger who will benefit from your death. Also, if an investor who takes out a policy on your life lies to the insurance company, you could be a party to fraud, which has been a serious problem with viaticals.

If you want to pursue the idea, the best way to go about it is through a financial planner or lawyer you trust, said Mary Beth Franklin of Kiplinger's Retirement Planning. "Don't just call an 800 number or respond to a solicitation."

You also want to be sure the investor buying your policy or your insurance capacity is an institution, not an individual who might become impatient waiting to collect. Recently two Los Angeles women were accused of killing two homeless men after taking out $2.2-million worth of insurance on their lives. Jenner said many investors are hedge funds and foreign banks.

A Prudential Insurance spokeswoman said the company would not issue a policy if it knew an investor was initiating the purchase. However, she said the company does not oppose investors selling policies they own.

In a follow-up to a reference to USAVoice.org in last Sunday's column, USAVoice managing director Alex Siman said the online company is assembling a database for legitimate purposes and is not a "phishing scam," as a reader characterized it as in a question.

Although the launch has been delayed, Siman said USAVoice plans to assemble the largest news organization in the world in which reporters will receive a percentage of the revenue if readers click on ads next to their stories. Siman said it is a "virtual company," with employees working from home. Yahoo removed the company's ads from its job listings after an investigation.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, go to www.sptimes.com/blogs/money or write Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified August 6, 2006, 06:28:59]