Buyer beware: The "unloading” of failed STOLI policies on an individual basis
This anecdote is a true story — I will not disclose others’ names to protect the innocent and, regrettably, most likely the guilty as well. This brief article is not of journalistic quality, I admit — I have not dug into and verified the facts. Take it with a grain of salt, if you must — but read on and judge for yourself.
We are brokers in the life settlement industry, which involves the purchase of seniors’ life insurance policies by investors who wait for someone’s death to collect their rewards. This is a shameful place to be, in an industry tainted with the stench of malfeasance. Bid-rigging, mismanagement, misrepresentations, fraud and bankruptcy plague the sector. An industry fraught with Ponzi artists using the life settlements name to defraud unwitting investors of their hard-earned money — the perpetrators of these misdeeds not knowing the first thing about life insurance or life settlements. We are worse than ambulance chasers. We thrive when others are sick. We pray for low life expectancies; we rejoice when others are about to die; investors rejoice when they do die.
Or some would believe or have you believe. In actual fact, we are business people performing a service, and doing the best we know how. We represent those to whom we owe a fiduciary duty and moral obligation.
We are really no different from you, but we happen to have landed in an industry with a serious public relations problem. A funeral home is a business that might be said to thrive on death, but does not cause death, hasten death and its shareholders certainly do not wish for death. Death just is.
But when Joe walked through our door today, and we discussed his possible purchase of a $6 million life insurance policy that was offered to him by an agent in the life insurance business — a proverbial friend of a friend — I came to realize why we are sometimes viewed as basically dogs living in the gutter.
Is that too harsh a description? Joe described the policy as being cheap — $140,000 annual premium per year. The agent told him the premiums might go up some, but he can’t know exactly how much. The current owner purchased the policy about two years ago from the original owner, six months after it was initially issued. The insured is 77 now, and has some serious health issues.
The agent told Joe they would provide medical records, but there was no mention of a particular life expectancy, life expectancy reports, or the like. The policy had never been shopped before — that is, offered out to the institutional market. This was a private sale. The owner is more interested in selling it privately, because he thinks he can do a bit better this way, rather than paying institutional fees.
Joe gave us the name of the insured. We checked the case out with our friendly local provider who told us that the case had been rejected by them. The medical records were provided by a doctor who has been red-flagged as being, let us say, unreliable. It would also be impossible to obtain a life expectancy (LE) report from at least one noteworthy LE company, because it also refused to accept any medical records from such doctor for the same reasons.
At the risk of being accused of profiling, I will mention that the policy, agent and owner were all apparently from the same borough, informally or purposefully blacklisted by some in our industry.
If one reads between the lines in the case mentioned above, it is possible to see how an entire group's reputation can be tarnished based on the actions of certain individuals. But I must say that while the reputation may be deserved from five miles up, unless one is a complete cynic (which I am not, today) then one must recognize that there are always exceptions to the rule, and one should think twice before casting aspersions on an entire group.
What was described, to me, however seems clear enough, although admittedly only on a gut level: a stranger-owned life insurance (STOLI) policy purchased two-and-a-half years ago, on the basis of false medical records, with the intent of resale after the contestability tolled, which was not too long ago. Failing the sale of the policy into the secondary institutional market, said policy owner is seeking to unload this policy at retail.
It is no wonder we get slapped around for being part of a disreputable, corrupt and otherwise immoral enterprise. If you are approached about the purchase of any marketable in an asset class with which you are totally unfamiliar, such as Joe was in relation to life insurance, do what Joe did. Find someone who you trust and ask a lot of questions.
Bottom line: With our advice to stay clear, we may have saved Joe about $1 million in premiums on a policy that, assuming it was not contested by the carrier on the basis of insurable interest or fraud, would not “mature” in any sensible investment timeframe.