Council on Aging Senior Guide 2012 - 109

COUNCIL ON AGING ORANGE COUNTY

part, based on the life expectancy of the insured person, often measured by their T-Cell count and their calculated short life expectancy. As better treatments were developed for AIDS and survival rates increased, investors often failed to meet the investment objectives they had been promised - often earnings of 40 percent or more on their original investment. As a result of improved life expectancy of the insured, investors were forced to pay more money to finance the premiums and keep policies in force longer than expected, sometimes much longer. As a result purchasers and investors looked for new investment opportunities and discovered the life insurance policies held by people 65 and older. Viatical settlements today are defined as life insurance policies purchased from someone who has a catastrophic or terminal illness expected to result in their death within 24 months. Life settlements on the other hand are generally the purchase of a life insurance policy from someone 65 or older with a life expectancy of two to twelve years (Skar, 2004). While the California Department of Insurance does regulate viatical settlements to some extent, it does not regulate life settlements. Selling a death benefit Today a significant number of older people own life insurance policies they purchased earlier in life for the benefit of their families or their estate. In later life they may be approached to sell their policy for a portion of the value of its eventual benefits. This is especially true for older people with high net worth and life insurance policies with large death benefits. The prospect of receiving immediate cash is sometimes very appealing or even irresistible, especially when ill and faced with high medical bills or other unexpected expenses. In other cases the original purpose of a life insurance policy may no longer exist, for example for the support of minor children who have grown to adulthood, or the premiums may become unaffordable as life circumstances change after retirement. When selling life insurance policies, benefits that would have gone to family members, paid estate taxes, or benefited a charitable organization will be realized instead by these life settlement investors, many of them large foreign institutional investors. The percentage of a death benefit that purchasers of these polices are willing to pay a person depends not just on the amount of the death benefit but the age and health of the insured person and their calcuCouncil On Aging-Orange County | 714-479-0107 | www.coaoc.org

lated life expectancy. The older and sicker someone is the more likely they are to get a higher offer. In most cases they will be offered more than the cash value their policy provides if they stop paying premiums and cash out their policy. In cases of a term life policy where there is no cash value in the policy if they stop paying premiums and the policy lapses, a cash offer may be even more attractive. No state regulation of life settlements A life settlement is often considered an investment, not an insurance product and therefore its sales usually do not fall under state insurance regulation. Many state laws that apply to insurance product sales may not apply to life settlements, depending on the laws a state has enacted. California has no laws regulating these transactions. For instance, there is no free look or ‘cooling off’ period once a person has signed a contract for the sale of their policy, nor is there a requirement that the commission a person receives when buying and selling one of these policies be revealed to the insured person. The individual who has sold their life insurance policy continues to be insured, but is often unaware that investors have the right to inspect their personal medical records and to contact them periodically to inquire about their health. Careful consideration should be given to all of these issues, and consultation with an accountant and tax advisor is strongly advised for anyone contemplating the sale of their life insurance policy. The sale of a person’s death benefits affects not just the insured person but their family members, their estate, and potentially their tax obligations as well. Concerns with investor driven purchases In general, when people buy life insurance they have an “insurable interest” in their own lives. Families are presumed to have an insurable interest in the family member who is insured, balancing out their interest as beneficiaries of the death benefits that will be paid with their interest in the life of their loved one. The concept of an insurable interest was intended to prevent gambling on human life, and has been embedded in U.S. law for more than a century (Bourland and Schultz, 2005; see p.8 Warnock v. Davis). Indeed an extreme example of what ‘insurable interest’ is intending to prevent is a case in L.A. last year involving two women who befriended homeless individuals, took out life insurance policies in their names and killed them after the
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Council on Aging Senior Guide 2012

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