The ads for something called "life settlements" appear on daytime TV tucked between Cash4Gold spots and the ones with the catchy get-your-degree jingle. Are you a senior with a life insurance policy who needs cash? Call now! The ad's happy ending: a smiling Gramps waving a check newly arrived in the mail.
Life settlements are a relatively new financial product -- one attracting a rapidly growing number of clients. It's a young industry, but one with roots in the so-called "viatical" settlements from the early days of AIDS that allowed terminal patients to extract cash before death from insurance policies. Life settlements are a twist on that, with senior citizens the target clientele. The market, virtually nonexistent in 2001, grew to $15 billion in 2006 and is projected by some to hit $160 billion as baby boomers retire.
That fast growth is one key reason why the scrutiny this new industry is getting in Minnesota and elsewhere is overdue. Legislators here are considering a crackdown on one troubling variation on life settlements called stranger-originated life insurance (STOLI); about a dozen other states have imposed restrictions on this as well. Another critical reason scrutiny is needed is the industry's macabre nature.
It's not a stretch to say that life settlements, particularly the STOLI variation, are a serious version of the KQRS Radio dead pool. Participants in the popular Twin Cities radio station contest "win" by accurately predicting which celebrities will die during the coming year. Life settlement investors profit on the same principle. Gramps is given a cash sum -- usually more than what insurers would give him but less than the policy's ultimate payout -- by a broker/agent representing investors.
In return, future premiums are often paid and investors -- not family -- pocket the death benefit. The sooner a life settlement person dies, the more profitable it is for investors. In the STOLI variation, strangers financially induce Gramps to take out a life insurance policy rather than putting up cash for an existing one. It's an arrangement that attracts shady operators and puts seniors at risk -- deals where brokers pocket huge commissions, don't give seniors the best possible payout, don't properly inform seniors of tax liabilities, problems with future insurability or privacy issues arising from the release of medical records. Anyone seriously considering a life settlement should think hard before signing anything, not the least because these business interests will have a stake in your death.
Any proposed legislation -- Minnesota's is championed by state Sen. Linda Scheid, DFL-Brooklyn Park -- has a delicate line to walk. While life settlements are distasteful, they remain a legitimate product that some may need, particularly in the age of Ponzi pirates and gutted retirement accounts. The new law should primarily protect consumers from STOLI situations yet allow those who need life settlement funds to safely access them. Its main goal should not be protecting the traditional life insurance industry business model, where profits are based in part on the surprisingly large number of policies that simply lapse without payout. The insurance industry has a big financial interest in limiting life settlements and is lobbying hard across the nation for laws that would do just that.
Scheid and high-ranking state Department of Commerce commissioners believe that the proposed Minnesota legislation hits this balance. The life settlement industry, while calling for STOLI crackdowns, believes the bill stacks the deck too far in favor of the traditional life insurance industry. Murray Frank, the Piper Jaffray chair in finance at the University of Minnesota's Carlson School of Management, is also concerned that the bill favors traditional insurers. Frank said there are some intriguing additional ideas to police STOLI and help consumers get the best possible life settlement deals. Scheid deserves credit for tackling a tough subject. At this early stage of the legislation, it would be worthwhile to explore additional perspectives to ensure that the bill provides the most comprehensive and up-to-date protection for consumers.
