Investors Recruit Terminally Ill to Outwit Insurers (WSJ)

[heli]

http://online.wsj.com/article/SB10001424052748704479704575061392800740492.html

FEBRUARY 16, 2010
Investors Recruit Terminally Ill to Outwit Insurers on Annuities
By MARK MAREMONT And LESLIE SCISM

PROVIDENCE, R.I. — "Terminal Illness? $2,000 in CASH, Immediately Available." That was the promise of an advertisement that appeared regularly in 2007 and 2008 in the Rhode Island Catholic, the official newspaper of the local diocese. The money, the ad said, was coming from a "compassionate organization" that wanted to provide "financial assistance" for those near death.

In reality, the ad was a recruiting pitch for a plan hatched by a prominent Rhode Island estate-planning lawyer, who believed he had discovered a way to use an investment product sold by insurance companies to make no-risk bets on the stock market. He recruited dozens of terminally ill people to, in effect, serve as paid fronts for purchases of the product, variable annuities. The lawyer and other investors put tens of millions of dollars into the policies, hoping to reap a profit when the recruits died...

Variable annuities are issued through insurance carriers, but function as retirement-savings vehicles akin to 401(k) plans. An individual puts in money upfront and can add more over time, which gets invested in stock or bond funds and grows tax-deferred. At retirement, a holder can withdraw the money, convert the accumulated amount into a stream of lifetime annual payments—or leave it sitting there for heirs. The twist that makes variable annuities attractive to professional investors is a money-back guarantee built into the plans, called a death benefit. In effect, insurers promise that a buyer's beneficiaries will get back at least the amount that was originally invested, less withdrawals. So if a holder puts in $1 million, and the market subsequently tanks, the holder's heirs will still receive $1 million. Some insurers added enhancements to this basic death benefit, including a built-in interest rate that gradually increases the minimum money-back amount. Insurers figured they could recoup the cost of the guarantees over time, through the hefty fees usually associated with the products.

Joseph A. Caramadre, the Cranston, R.I., lawyer behind the ads recruiting the terminally ill, is an insurance expert with a high profile for his philanthropic activities... "Joe's specialty is closely reading insurance contracts," says his lawyer, Robert G. Flanders. About 15 years ago, he says, his client realized that variable annuities have two significant differences from regular life insurance. Because the products are sold primarily as investments, insurers generally don't ask about the health of the "annuitant," the person whose death triggers the death benefit. And some don't seek information about the buyer's relationship to this annuitant. That leaves the door open for professionals to invest in somebody else's policy, says Mr. Flanders. Some observers find such tactics ghoulish, but say insurers are partly to blame. "The amazing thing to me is that the money comes in, and they just take it," no questions asked, says Joseph Belth, professor emeritus of insurance at Indiana University...

[sharesunited]

1. Contracts which speculated on the lives of others used to be unenforceable in this country.

I smell sulphur.

[naaman fletcher]

2. I don't see the problem.

Someone who is going to die gets money for not doing anything. The person who gives him money makes money, the only people getting screwed are the insurers. Sounds like a win-meh-win.

[EC]

4. Until the person taking out the annuity decides waiting for his

patsies to die is a hardship and starts killing them off...

[naaman fletcher]

5. good point. /nt

[yellowcanine]

6. Thus driving up insurance rates for honest people. I see the problem.

It is dishonest and immoral.

[Warpy]

3. This is a variation of the story of the Durable Michael Malloy

The story goes of a group in a bar watching a consumptive, crippled, ancient alcoholic being tossed out of bar after bar for trying to hustle the patrons for for drink and the bar for bar food. Realizing that nobody in that kind of shape was going to last long, the patrons hatched the perfect plot: buy a huge life insurance policy on him with themselves named as beneficiaries.

Some months passed and they got tired of dipping into their own beer money to pay the premiums, so they decided to help Michael Malloy along to meet his maker. The story goes they tried antifreeze, horse liniment, rat poison, turpentine, and finally ran over him with a taxi. Nothing worked and he kept showing up to hustle more alcohol. They finally got him by renting him a room and leaving the gas jet on. The insurance company cried foul, an investigation was launched, and they went to prison.

Life insurance on the dying seems like a great idea, but it doesn't often work as advertised, in other words.

http://en.wikipedia.org/wiki/Michael_Malloy

This was one of my mother's favorite bedtime stories when I was a kid. I had a strange childhood.