Wealthy Engage in Controversial Re-selling of Life Insurance Policies

The deal the broker discussed with his well-heeled client seemed like a good idea: Buy a $10 million life insurance policy, and if the client wanted to raise some cash, the broker could sell the policy to an investor for a tidy profit.

So the client took advantage of the offer. The broker re-sold the $10 million policy later that year, yielding a $550,000 windfall for the client.

The investors who bought the policies, who remain unidentified, took over payment of the premiums and became the new beneficiaries. The client followed up that transaction by selling a second $5 million policy on his life, earning $850,000. Another unknown investor became the beneficiary.

But then the client had second thoughts. In a lawsuit, he claims he was not fully apprised of the ramifications of what he was doing. Further, he contends that the broker failed to tell him that the new policies, now in an outsider's hands, would significantly reduce his ability to buy additional life insurance.

The client, CNN talk show host Larry King, thus became the subject of a cautionary tale in what insurance regulators say is a quietly but rapidly booming trend among wealthy Americans: selling one's life insurance to strangers.

Comprehensive data on the secondary market for insurance policy sales is incomplete, in part because states regulate the industry and do not collect information uniformly. But industry analysts suggest that if the pace of life insurance policy re-sales over the past several years is any indication, the $30 billion that traded hands last year could easily grow to more than $150 billion over the next decade.

"The lure of easy money is seducing participants into the secondary market for life insurance and putting life insurers in compromising positions," Fitch Ratings said in a special report in September. "The flow of capital to date and the potential for this market have created a gold rush atmosphere, increasing risks for all involved."

In the King case, the talk show host alleges that Bethesda insurance broker Alan Meltzer did not properly review the tax implications for King if he sold the policies. The suit claims Meltzer did not disclose the full amount of commissions, fees and payments he received nor did he act in good faith to find prospective purchasers who would pay a higher price. The broker also did not properly advise King on whether he would have been better off keeping the new policies and selling older policies he held, the suit claims.

Meltzer, through his office, declined to comment. He denied the accusations in a response to King's suit, filed with the U.S. District Court for the Central District of California. Meltzer contends in the response that King was "very interested in selling his insurance on the marketplace at a substantial profit. This is what happened."

The broker also alleges that "Larry King pretends that he was interested in purchasing additional life insurance. . . . During each of the transactions complained of, [we] expressly told Larry King's advisers that Larry King was better off keeping the new insurance rather than selling."

King's attorney, Marshall B. Grossman, a partner in the Los Angeles law firm Bingham McCutcheon, described the practice of flipping insurance policies as "an issue that has been hidden from view for too long, in part because many people who have been victimized are quite likely embarrassed and have sufficient means so that they just move on."

Industry-wide, there are bigger questions about the ethics and legality of brokers selling policies so they can then flip them.