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LIFE SETTLEMENTS. DISCLAIMER The opinions and beliefs stated herein are not those held or endorsed by the Texas Department of Insurance. A HISTORY OF LIFE SETTLEMENTS.
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DISCLAIMER The opinions and beliefs stated herein are not those held or endorsed by the Texas Department of Insurance A HISTORY OF LIFE SETTLEMENTS
The viatical settlement industry was created in the late 1980’s from the AIDS epidemic. A vibrant and competitive market for these policies was created. • Viatical is derived from the Latin word viaticum, which referred to "the money and supplies given to Roman officials before risky journeys to far-flung regions of the empire.” • Early 1990’s NAIC created Viatical Settlement Model Act and Model Regulation and numerous states passed legislation to protect the person selling their policy, otherwise known as the viator. • During the mid to late 90’s, problems began - cleansheeting.
CASE STUDY • Michael Lee Davis, formerly Walter Waldhauser, Jr. Waldhauser/Davis was a principal of Southwest Viatical, an entity that held a broker registration from 1996 to 1998. In 1979, Waldhauser and Allen Janeka killed 3 people in a murder-for-hire scheme. One was 14 months old. Waldhauser avoided lethal injection by pleading guilty to three counts of murder. After serving less than 10 years of his 30-year sentence, he was paroled and legally changed his name to Michael Lee Davis. In 1996, TDI issued a broker certificate of registration to his company, Southwest Viatical. Davis went back to jail for defrauding insurance companies by cleansheeting life policies. Subsequently, we got our current statute (2nd revision). Allen Janeka was executed on July 24, 2003.
Life Settlements • What is a life settlement? • "Life settlement" means an agreement that is solicited, negotiated, offered, entered into, delivered, or issued for delivery in this state under which a person pays anything of value that is: • (A) less than the expected death benefit of a policy insuring the life of an individual who does not have a catastrophic or life-threatening illness or condition; and • (B) paid in return for the policy owner's or certificate holder's assignment, transfer, bequest, devise, or sale of the death benefit under or ownership of the policy.
In the late 1990’s, life settlements evolved when it was discovered there was an enormous amount of insurance in force held by senior citizens who were not “terminally ill” but still had a limited life expectancy. Many of these policies had very large death benefits. These “senior settlements” have attracted capital from institutional investors, including banks, pension funds, investment groups and even insurance companies. • Like the viatical settlement market before it, with a large portion of the existing pool of life insurance policies on seniors having been purchased, producers, in conjunction with other individuals, have been manufacturing life settlements by soliciting and obtaining policies intended for the senior settlement market.
SALES PITCHES FOR LIFE SETTLEMENTS • The stock market will take all your money • The economy is terrible • Who wants to earn more than twelve percent on their money? • Is this legal? • What about insurable interest? • Is this a bad idea?
Those promoting or selling interests in Life Settlements, claim the legal basis has existed since 1911, the U.S. Supreme Court held in Grigsby v. Russell “…it is desirable to give life policies the ordinary characteristics of property; to deny the right to sell…is to diminish appreciably the value of the contract in the owner’s hands. It has been decided that a valid policy is not avoided by the cessation of the insurable interest…” • These are half-truths and totally taken out of context. • “A contract of insurance upon a life in which the insured has no interest is a pure wager that gives the insured a sinister counter interest in having the life come to an end.” • “The very meaning of an insurable interest is an interest in having the life continue, and so one that is opposed to crime.” • “So far as reasonable safety permits, it is desirable to give life policies the ordinary characteristics of property.” • “And cases in which a person having an interest lends himself to one without any, a cloak to what is, a wager, have no similarity to those where an honest contract is sold in good faith.” • “On the other hand, it has been decided that a valid policy is not avoided by the cessation of the insurable interest, even as against the insurer, unless so provided by the policy itself.”
Life Settlement Problems • Stranger Originated Life Insurance (STOLI) • Buyer beware: • Many policies sold through non-recourse premium financing • Market is flooded with life insurance policies for sale • Life Insurance was not intended as an investment for strangers • Insurance companies are denying death benefit claims and filing lawsuits • Case law that gambling on other people’s lives is prohibited • Void and against public policy • Solvency
Free Insurance – Free MoneyPlanting Life Settlement Trees • In 2007 and 2008, many free lunch/dinner seminars were held all over the country • Searching for healthy and wealthy seniors that will qualify for large life insurance policies • Two years later, the Life Settlement Tree is ready to be sold • Life insurance companies claim they do not want stranger owned life insurance • Market is flooded with Life Settlement Policies
Traps and Schemes • Pick your poison - Ponzi scheme or • Bonded life settlements • If insured does not die within life expectancy period, company pays death benefit in exchange for life insurance policy • These are being marketed and sold • These alleged bonds are from unauthorized company • TDI has not seen a valid bond from an authorized company • Just run on down to Balgi and make them pay
Secure Investment Services – (SIS) Company selling fractionalized interests in bonded life settlements: • When something sounds to good to be true – it is probably a scam • This was a Ponzi scheme collected ~ $30 million • Principals of company were indicted • SEC filed receivership • Introduction to Kindness and Midwest Medical Review • Company names disarm – Not called RipUoff or Dewey, Ceatum & Howe Note: For people age 65 and older, special attention is required to ensure customer does not understand the scam
National Life Settlements • Target – teacher’s retirement • Felon gets Texas agent to register as Life Settlement Provider • Felon gets agent to rent registration to bad guys • TDI registration provided some legitimacy to operation • Ponzi scheme which gave notes, offering to pay 10% in exchange for retirement money • SSB and AG seized money $20 million (only lost 8 million)
Re-Sale Life Insurance Policies? • Latest and greatest • 16.5% interest paid • Double due diligence has been performed • 98.5% accuracy of LE • Achieves total transparency for the process • Are you kidding me • Who buys used tires?
Typical results of Life Settlement Companies that target retail investors • Receiverships • Accelerated Benefits Corporation – www.secreceiver.com • Mutual Benefits Corporation – • www.mbcreceiver.com • Secure Investment Services – • www.secreceiver.com • National Life Settlements – • www.nlsreceivership.com
What can the industry do to minimize or stop STOLI? • Ask better questions in application • Require and verify proof of net worth • Look for STOLI red flags • Don’t issue the policy if it does not pass the smell test • Terminate appointments of agents or companies that engage in life settlement schemes • Require strict underwriting procedures when there is ILET, premium financing, or large death benefit • Publicity campaign to expose
