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Senators Decry Flipping Of Life Insurance Policies

By David S. Hilzenrath
Washington Post Staff Writer
Thursday, April 30, 2009

A full-page ad in the Chicago Tribune invited people age 50 to 85 to come hear football great Mike Ditka and learn "WHY WALL STREET WANTS TO BUY YOUR LIFE INSURANCE POLICY."

The ad shows how a murky and potentially risky market for life insurance has been pitched to vulnerable consumers, an Illinois regulator told a Senate panel yesterday.

Members of the Senate Special Committee on Aging yesterday expressed concern about dangers for senior citizens from what the hearing agenda described as "Betting on Death in the Life Settlement Market." Panel Chairman Herb Kohl (D-Wis.) said selling a life insurance policy to investors "can be fraught with possible hidden pitfalls."

Investors have discovered that there is money to be made from buying people's life insurance policies, paying the premiums, and collecting the eventual death benefits. The investors offer policyholders more than they could collect from the insurance companies for surrendering the policy. And in the case of policies that have no surrender value, they enable consumers to liquidate policies for cash instead of simply allowing coverage to lapse.

The strategy can pay off for investors because insurers price coverage on the assumption that many policyholders will stop paying premiums before any death benefits are triggered. By targeting people who aren't expected to live long, and keeping the policies in force until the insured dies, investors can beat insurers at their own game.

Much of the criticism at yesterday's hearing focused on a variant of the strategy in which promoters offer senior citizens enticements to take out policies just to flip them to investors. Seniors who do that "may not know that they are participating in insurance fraud," Kohl said.

Prudential discovered last year that, after Ohio passed a law prohibiting so-called stranger-originated life insurance, a 74-year-old woman was driven from her home in Cleveland to Pittsburgh to sign an insurance application, Prudential executive James Avery told the committee. The woman, who lived on Social Security and had a net worth of $2,000, was shocked and frightened when she learned from Prudential investigators that the policy had a death benefit of $9 million, he said.

It isn't clear how widespread such practices are today. The Tribune ad cited by the Illinois director of insurance, Michael T. McRaith, appeared in 2007. The firm that ran the ad, Phillip Roy Financial Services, wasn't involved in stranger-originated life insurance and never completed a conventional life settlement because it was "too late to the party" when the credit markets froze, company President Phillip Wasserman said in an interview.

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