Investor-initiated life may be in jeopardy

Feb 27, 2006 @ 12:01 am

By Gary S. Mogel

NEW YORK - Several states are expected to follow New York's lead and ban investor-initiated life insurance.

The policies - in which investors lend wealthy individuals money to pay life insurance premiums for a designated period - are scheduled to be discussed next month during a committee hearing at the Kansas City, Mo.-based National Association of Insurance Commissioners' national meeting in Orlando, Fla.

In December, the New York State Insurance Department banned the insurance arrangements as a "speculative investment for the ultimate benefit of a disinterested third party" lacking an insurable interest.

Regulators, and many insurers, greet the product with suspicion and outright bans, but the coverage may have valid uses in estate planning, industry observers noted.

Insurers often are unaware of the contract between the investor and the policyholder, and some companies, including MetLife Inc. in New York, have objected to their policies' being used for this purpose.

Death benefits

If the individuals die within the designated period, their beneficiaries get the death benefits less the premiums and interest.

After the period expires, the individual has three options: repay the loan with interest and keep the policy, sell the policy and repay the loan with interest or transfer the policy to the investor, usually a hedge fund. If the policy is transferred, the investor receives the death benefits when the insured individual dies.

The interest rates often are double digit and can be as high as 28%. But regulators so far have voiced concerns only about the lack of insurable interest and not the possibly usurious interest rates.

Regulators contend that the investors don't have an insurable interest at the time the policies are issued, as is required by most state insurance laws. An insurable interest usually isn't required at the time a policy is sold or transferred, so traditional viatical arrangements generally are not challenged on this basis.

"Uncertainty concerning the amount and existence of the estate tax in the year a person dies is a legitimate reason for buying these policies," said Doug Head, executive director of the Viatical and Life Settlement Association of America in Orlando, Fla. He noted that the death benefits can be used to pay the estate taxes so heirs won't be burdened by them.

"If the annual estate tax reductions now in force and backed by the Bush administration stand - and the tax doesn't come roaring back in 2011 - the policy won't be needed for this purpose and can be transferred to investors. People won't want to pay premiums on policies they don't need," Mr. Head said.

"Estate tax payment may be a legitimate reason for the coverage, but wealthy clients can buy the policy themselves. They don't have to give away their insurable interest to a third party," said Thomas Henske, a partner with Lenox Advisors Inc. in New York, which manages $1 billion in client assets.

"Also, an adviser probably wouldn't want to recommend to a client a product that's currently receiving such bad publicity - whether that bad press is warranted or not."

Even investors are concerned about the legality of these deals.

Normally, a trust is established to create a reason for the insurance and an apparent insurable interest, according to Wm. Scott Page, chief executive of The Lifeline Program, a life settlement company in Atlanta. "The trust isn't an outright sham, but it's questionable whether it would hold up court," he said.

There haven't yet been any cases testing the legality of these trusts.

In addition, the investors are worried that the insurers may not pay the claim if the adjuster discovers that there was no insurable interest at the time the policy was purchased.

"If there's millions of dollars in death benefits on the line, and the insurer investigates and discovers there was no insurable interest, the claim could be denied," said Mr. Page, whose firm last year surrendered its viatical settlement provider license in Florida following completion of an examination by the state Office of Insurance Regulation.

"Insurance companies may be the real losers in these types of transactions, because they calculate premiums based on anticipated lapse rates, and this is business that doesn't lapse," Mr. Henske said.

But supporters of investor-initiated life insurance insist that the policies are little more than a form of premium financing.

"The investors are assisting people in paying the premiums," Mr. Head said. "If the contracts have inappropriate provisions, state laws will prevail in those instances."


What do you think?

View comments

Upcoming event

Sep 10


Denver Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched


How advisers can be a gamechanger for women investors

Why women defer to men when it comes to finances and how advisers can combat this phenomenon and make a difference for female investors, according to Heather Ettinger, founder and CEO Luma Wealth Advisors.


How the 2020 elections could impact ESG investing

Joseph Keefe, president of Impax Asset Management, on the elections and how advisers can build a bridge to the next generation of clients with ESG investing.

Latest news & opinion

Charles Schwab reportedly in talks to buy USAA brokerage, wealth management business

The deal would net Schwab roughly $100 billion in new assets.

Advisers scramble to help retirees navigate looming Fed rate cut

The Fed's first interest-rate cut in a decade has advisers warning against chasing the bait of risk over safety.

CFP Board to announce possible delay of new fiduciary standard

Organization's CEO confirms meeting with Edward Jones, says broker-dealer still considering how to move forward.

Departure of Alexander Acosta could slow DOL effort to revise fiduciary rule

Acting secretary Patrick Pizzella will have to make political decision to move ahead.

SEC member Peirce to brokers: Talk to us early, often about Reg BI implementation problems

She's willing to advocate for additional compliance time if firms have made a good faith effort.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print