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Terrified by unscrupulous agents? Focus on insurable interest. (Part 7 of 11)
Thursday October 25, 2007 12:00AM | Click here to visit original article.
As egregious as the life insurance agent's conduct sounds, many of them are starting to tell their seniors that they can repeat this process "every two years" which leads to the next problem, that of insurable interest. The concept of insurable interest means that you have something worth insuring. In addition to other things, this keeps people with nothing to lose from buying a lot of life insurance and then suddenly being found dead. The concept of insurable interests is why the bum at the bus depot can't buy $5 million in life insurance, but the person with a $5 million estate whose heirs will need the money to pay estate taxes and other costs can. The problem with insurable interest is that even though it grows with the wealth of the policyholder, it is still finite. Just as one cannot buy $5 million in life insurance on the bum at the bus depot, one cannot buy $50 million in life insurance on somebody who only has a $5 million estate. Yet, that is exactly what is happening with many of the life settlement deals where a portion of the money is being used to buy new policies. What goes on to avoid the insurable interest issue is tantamount to fraud, as the insurance agents who fill out the applications either fail to disclose the existence of other insurance, or they inflate the value of the senior's wealth. While in the past the life insurance companies have not paid much attention to the issue, they are now redrafting their forms to pick up these instances of multiple sales of life insurance to a single senior. A significant risk for wealthy people who engage in these transactions is that their estate could lose - big. If a life insurance company later decides to challenge the insurable interest issue and wins, it means that the life insurance policy held by the investors has become valueless, and the investors will then sue the estate of the person for fraud and seek damages equal to what they would have made had the policy stood up. Of course, this means the face value of the life insurance policy is much larger than the pittance that the wealthy person originally made by selling it. The investors need not be much concerned about the insurable interest problems because for them it is a "heads I win, tails you lose" scenario. If the policy survives an insurable interest challenge, the investors get the face value death benefit from the life insurance company and go away fat and happy. But if the policy doesn't survive an insurable interest challenge, then the investors get to sue the helpless (because dead people can't testify in their defense) estate for the fraud of the wealthy person who sold them the now "bogus" life insurance policy, and they can collect the face value of the life insurance policy from the estate. From the investors' view, this is of course another excellent advantage to dealing only with wealthy people. ---Source: http://www.quatloos.com/life_settlement-life_settlements.htm |
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