Archive for Sunday, February 24, 2008
Kansas commissioner decries ‘death futures’
February 24, 2008
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Sandy Praeger knows she can't just come out and prohibit people from buying and selling their life insurance policies for profit, no matter how unseemly the process might be getting these days.
"But we can make these deals a lot less attractive," said Praeger, Kansas commissioner of insurance.
That's why Praeger, who also serves as president of the National Association of Insurance Commissioners, is urging the Kansas Legislature and lawmakers in other states to change laws to make so-called Stranger/Investor-Oriented Life Insurance policies illegal.
Under such policies, an outsider persuades someone - typically 65 to 85 years old - to take out a life insurance policy. The insured person gets an up-front payment and allows the outsider to pay monthly premiums, with the understanding that the outsider will assume ownership of policy and its eventual death benefit after two years, sometimes after another payment is made to the insured.
"There's a concern that this is a little too much of a get-rich-quick scheme," said Praeger, a Lawrence resident and former Lawrence mayor. "We're just trying to protect people from participating in something that's highly questionable. You're buying insurance under false pretenses."
Praeger testified last week at the Kansas Statehouse, telling members of the Senate Financial Institutions and Insurance Committee that Kansas seniors were particularly vulnerable to such "death futures" contracts.
Among other problems, she said, seniors engaging in such transactions could expose themselves to unexpected income tax liability and limited future insurability.
That, she said, and life insurance companies could be prompted to boost life insurance rates for everyone to make up for the payoffs being made on bets laid down by outsiders with no other interest in someone's life other than an early demise.
"This effectively converts life insurance into an investment or security, and is essentially a wager on an individual's life," Praeger told the committee. "The sooner the death, the greater the profit."
Current law prohibits anyone from selling off a life insurance policy within two years of its beginning. The law being considered by legislators in Kansas and another 19 states would extend that to five years, making such moves less attractive to investors who otherwise would be forced to pay premiums for five years before a potential payoff.
The proposed law also would require new policyholders to sign a document affirming that they have no intent to sell the policy as part of a previously arranged investment deal. That would give insurance companies an opportunity to declare such policies void, another tactic that could make such investments less attractive.
The proposed legislation would not prohibit so-called life settlements, in which people who legitimately bought life insurance later choose to sell off their future benefits once their need for such insurance no longer exists, Praeger said. Other exceptions also would go into effect to protect legitimate sales.
But the days of dealing in life insurance as a financial security - and not as a policy providing a family or business with a form of financial security - need to end, she said.
"This just doesn't feel right," Praeger said, from her office in Topeka. "We've had complaints and had people who have lost money in these deals. There is a lot, potentially a lot of money to be made on people dying. And if it doesn't feel right, we do something to try to stop it before we have a lot of victims."
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24 February 2008
at 7:49 a.m.
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Godot (Anonymous) says…
The majority of life insurance policies are lapsed or cancelled before the insured person dies; that is how the life insurance companies make so much money. I hate to say it, but, in this instance, Praeger is taking the side of the industry she is supposed to regulate.
24 February 2008
at 7:55 a.m.
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justthefacts (Anonymous) says…
Maybe the article needs to explain it in smaller words, but let me get this right. Someone else pays my premium for me, and pays me money up front, and all they have to do to get the money frin the life insurance is hope I live at least two more years? Who is harmed by that scenario? Certainly not the insurance company. They get their premiums they contracted for don't they? Who cares if a stranger to the insured is paying them? WELL maybe the insured if the stranger is likely to help them die after 2 years. IS that what is feared?
There used to be a princple in insurance law that required those who were doing something like this to be related on some way; that kept perfecft strangers from insuring someone else and having a reason to “root” for their demise (at best - at worse they'd help death along). Guess that principle does not exist any longer……Or is the Comm'r trying to codify an old common law princple?
24 February 2008
at 7:58 a.m.
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justthefacts (Anonymous) says…
I think G is right. The only “loser” in this scenario is the insurance company. They have to pay out life insurance when they were hoping/betting that the policy would lapse before hand. Insurance is nothing but legal gambling. Anytime the odds swing in favor of the insureds, the insurance companies figure out a way to write policies or get laws changed so they are once again getting the better odds. Why doesn't the “free market” apply?
24 February 2008
at 8:09 a.m.
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justthefacts (Anonymous) says…
Hmmm. Separate articles - same topic. http://www2.ljworld.com/news/2008/feb… Gives the “Reasons” this type of situation is frowned upon. Sounds like the only Losers may be insurance companies and greedy relatives. How is this a bad deal for the older insured person?
24 February 2008
at 9:06 a.m.
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BigPrune (Anonymous) says…
It's a risk for the investor, and a bonus for the elderly insured since they get something up front. Why should Praeger have a problem with this? The insurance industry is a huge scam. Why not make whole life insurance policies illegal insurance commissioner? - they are a HUGE ripoff.
25 February 2008
at 3:34 p.m.
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Godot (Anonymous) says…
If you cannot afford the cost of the insurance, but someone else can, and is willing to pay you to make application and make them beneficiary after the policy is issued, what is wrong with that?
How will this affect mortgage or bank or employer owned life insurance, where the unrelated party is the beneficiary and the owner? Surely there will have to be exceptions to Mrs. Praeger's rule in those cases. If there is an exception made for them, then what is to keep these entities from packaging their future gains from the death of their mortgage holders and selling them the way they did sub prime mortgages? Then we have another situation where the ability to profit from a certain type of financial instrument is taken away from the ordinary citizen and placed only in the hands of the people who already have the money.