Death is a certainty, but is it a good bet? Milwaukee lawyer and estate planner Barbara Becker got a call from a broker asking her to help persuade an 80-year-old client to buy an $800,000 life insurance policy. The broker claimed the deal was a no-risk way for Becker’s client to make easy money.
Here’s how it would work, Becker was told: An investor would pay the premiums for two years—in this case more than $50,000 a year. After two years, Becker’s client would sell the policy to the investor for $200,000. The investor would then become the beneficiary of the policy and collect the $800,000 when the client died. If Becker’s client died within the two years, the investor would have a lien against the policy for the amount spent on the premium.
“My client wasn’t interested because he thought it sounded dishonest,” said Becker. “But a lot of people are seeing these policies as an investment.”
Over the past two decades, a branch of the life insurance industry has evolved into a high-stakes gamble on human life that focuses on older people. What’s different about this type of insurance is that brokers are recruiting retirees to buy life insurance policies with the intent of selling them to strangers who will profit from the retiree’s death.
The new market, known as life settlements, has its roots in the 1980s when terminally ill AIDS patients who needed money for medical treatment and living expenses sold their life insurance policies early. When new drug treatments allowed AIDS patients to live far longer than expected, the industry looked elsewhere.
“That’s when brokers struck upon the elderly as a target for life settlements,” said Connie O’Connell, a former Wisconsin insurance commissioner. “The typical target is between 70 and 80 years old.”
The life settlement industry is expected to grow to $21 billion in 2012 nationwide, up from $6 billion in 2006.
Less affluent people are now being targeted. The average policy is $250,000, a sum that retirees with modest assets are eligible to purchase.
Critics warn that the policies may not be good for older clients or for investors. Clients may be unable to purchase additional life insurance if there is a life settlement policy in their name. And the policies may be risky investments.
Milwaukee lawyer David Melnick represents about 100 Wisconsin investors, almost all over 60, who learned last year that they’d lost more than $60 million when they unwittingly bought into funds of bundled, overvalued life settlements.
“The investors might recover 2 cents on the dollar. Many of them went to bed worth millions and woke up with nothing,” he said.
The big winners are the insurance brokers who arrange the sales and often collect 40 to 90 percent of the first year’s premium.
Earlier this year, AARP Wisconsin supported a bill passed by the legislature that banned “stranger-originated” life settlement transactions. In doing so, Wisconsin joined 28 other states that regulate the sale of life insurance policies by policyholders who may want to cash in their policies. The legislation takes effect this fall.
“In Wisconsin, the life settlement industry was largely unregulated,” said Jeanne Benink, AARP Wisconsin program coordinator. “In this environment, conditions were prime for fraud and consumer abuse. You have to watch yourself against potential scams. This law allows a legitimate life settlement market to thrive while discouraging entities from creating life insurance policies for profit.”
Marie Rohde is a freelance writer living in Milwaukee.