Investors Seek Profit
In Strangers' Deaths
By LIAM PLEVEN and RACHEL EMMA SILVERMAN
May 2, 2006; Page C1
Regulators are poking into an unusual and fast-growing corner of the life-insurance world in which investors can profit when complete strangers die.
The business involves individuals selling the right to death benefits from their life-insurance policies -- often $1 million or more -- to investors. In exchange, individuals get cash while they're still alive.
The practice cropped up in the 1990s, mainly among AIDS patients with big medical bills. Those deals, which also involved other terminal illnesses, were called viatical settlements. Now there's a much more widespread market, known as life settlements, involving a widening swath of relatively healthy, typically elderly, Americans.
A 2005 report by Sanford C. Bernstein & Co. estimated $13 billion worth of life-insurance policies had been sold by policyholders to life-settlement investors, a small subset of a $9 trillion industry, but up from $200 million in 1998. The number could reach $160 billion in the years ahead, according to the study.
This represents a potentially important shift in how life-insurance policies are used. Regulators are wrestling with whether this pushes life insurance from its traditional role -- providing benefits to loved ones after a breadwinner dies -- into a speculative investment product. The presence of a new class of speculators could transform the business and lead to unforeseen consequences. For instance, it could force insurers to raise the price of insuring the millions who use policies the old-fashioned way.
A primary concern is a subset of life settlements known as nonrecourse premium financing. In typical deals, outside investors play an active role in courting new policyholders, lending them the money to purchase the policies. After a couple of years of coverage, the individuals then can turn over the policies -- and the obligation to pay the premiums -- to investors in exchange for retiring the loans.
Robert Henrikson, chief executive of MetLife Inc., says some people might buy policies just to sell them to investors, something that would be "a perversion of what life insurance is about."
At this point, it isn't clear whether regulators will choose to clamp down on the burgeoning industry. The National Association of Insurance Commissioners will hold a hearing in New York tomorrow to consider whether state regulators need to exert more control over the market. Meanwhile, New York Attorney General Eliot Spitzer is investigating the role played by middlemen who arrange the transactions between policyholders and investors.
Meantime, life insurers have got lots at stake financially. When they write policies, they often assume some will lapse and they won't have to pay claims against them. When investors buy these policies, that becomes less likely to happen, potentially putting insurers on the hook for bigger payouts.
Most major life insurers have issued internal memos essentially banning agents from selling investor-backed policies that are intended to be sold after two years. Some insurers also ask customers during the application process whether they intend to sell their policies.
Typically, consumers have had a few choices for life-insurance policies they might not want anymore: Let them lapse or return them to an insurance company in exchange for a relatively small payment.
By selling to third parties, policyholders can get much more than what they would receive from their insurers. For instance, if an insurance company is willing to pay $50,000 to buy back a policy with a $1 million death benefit, a life-settlement company might pay $200,000.
"All we're doing is paying you more for an asset than the insurance company is willing to pay," said James Terlizzi, chief executive of Peach Holdings Inc., a Boynton Beach, Fla., finance company that purchases assets like life-insurance policies and winning lottery tickets in exchange for up-front cash.
Insurance payouts are normally income-tax free for beneficiaries, but investors in these deals generally owe income tax on some proceeds. Sellers of the policies also generally owe taxes on the money they receive in a life settlement.
At its meeting, NAIC members will begin discussions about whether, to reduce speculation in the business, they should seek to create a minimum holding period of five to seven years for policyholders.
"One of the things that bugs me personally is these two-year deals," said Jim Poolman, North Dakota's insurance commissioner and chairman of an NAIC committee on life insurance.
Critics say nonrecourse premium financing deals flout state "insurable interest" laws, which prevent individuals or institutions from buying new policies on people with whom they're not directly associated. Such laws go back to 18th-century England, when investors bought policies on famous figures with health problems, as a form of gambling.
Regulators also might consider greater disclosure on commissions earned by brokers in the business.
Broker compensation is an area of interest to Mr. Spitzer. In March, National Financial Partners Corp., a network of financial advisers who provide life insurance and financial-planning services to wealthy individuals, disclosed it received a subpoena from Mr. Spitzer's office related to life settlements.
Some of NFP's subsidiaries act as brokers and agents for the sale of policies to investors. The subpoena probes whether NFP manipulated the bidding process for these policies, by submitting fictitious bids or withdrawing bids in exchange for compensation from other players in the market. In a recent Securities and Exchange Commission filing, the company said the investigation was "ongoing" and it was cooperating. Company spokespeople declined to comment beyond the filing. Mr. Spitzer's office declined to comment.
Write to Liam Pleven at
liam.pleven@wsj.com and Rachel Emma Silverman at
rachel.silverman@wsj.com
"I used to be on an endless run.
Believe in miracles 'cause I'm one.
I have been blessed with the power to survive.
After all these years I'm still alive."
Joey Ramone, em uma das minhas músicas favoritas ("I Believe in Miracles")