Since many insurance agents who are reading this text are also licensed to market securities, for purposes of this discussion, it is assumed that the student is versed somewhat in the inner workings of Variable Annuities. This is a product that has been accused of being abused as much, if not more so, than any other insurance product. Because of these endless sales abuse accusations, the nation's securities cops have proposed tightening the rules regulating annuity sales. Insurance companies, who have sold Variable Annuities for years, do acknowledge some abuse but maintain that they are now under control and sales abuses have been stringently dealt with. There is supporting evidence to show that between the state regulation of insurance companies that market this plan, and the SEC and NASD requirements, abuse has been kept to a minimum recently. Still there are those whose shrill cries gather attention once in a while.
It is easy to understand why this product as caused such dissension as it is the best of both worlds in many ways—the stability of the insurance industry and the ability to share in advances in the national economy.
It is rather amusing to those in the insurance industry to read some of the loud objections to the plan that have sprung up on the internet. One of the accusations is that since insurance brokers and securities brokers are receiving these huge and onerous commissions. These commissions often are pegged to the length of the surrender period—if the surrender period is 7 years, then the commission is 7%. This may be so in a few instances, but simply put, the average commission paid is between 4% and 8%. Substantial, but too high?
Those who are so vociferously objecting to these "high" commissions appear to be those who make a living selling only securities. With the modern economy growing and the market on a pogo stick ride, some stability that can be obtained by the use of Variable Annuities should be most welcome.
The primary benefits of variable annuities are:
In all fairness to those who are denigrating Variable Annuities, stack these benefits up against mutual funds and compare ALL of the benefits.
That is not to say that Variable Annuities are not somewhat complex. It is a marriage of an insurance product and a securities product—often compared to crossing a horse with a donkey and you get a mule, but a mule is much superior to horses or donkeys for strength and endurance. Looking at the product as to how it works, a Variable Annuity is, in many cases, an "uninsured" securities/insurance product that provides investment options— much like mutual funds—for long term investors, who want an extra way to save for retirement. Further, these investment options (sub-accounts) are packaged within a Variable Annuity on a tax-deferred basis.
Variable annuities are usually considered as strictly supplemental retirement investments. Therefore, to be ethical (and stay out of trouble), a prospect or client should not purchase a Variable Annuity unless they can answer "yes" to these three questions"
RULE: BE AWARE OF WHAT THE MAXIMUM CONTRIBUTION THAT CAN BE MADE TO EACH OF THESE PLANS EARLY IN THE CONVERSATION AS THAT WOULD DETERMINE WHETHER A VARIABLE ANNUITY IS ETHICALLY FEASIBLE.
This is not to imply that the Variable Annuity is the only other investment that can be made, as each situation is different (obviously). The point is that before one should even start talking about a VA as an investment, these questions should be answered.
Be prepared to discuss the additional fees as in many cases Variable Annuities may cost more than other investments because of the fees. Often there is a comparison between the return from a Variable Annuity and from mutual funds. Of course, there is not the tax advantage of VAs, regardless of how loudly the naysayers insist that because of the fees, VAs cannot perform as well as mutual funds. However:
FNot only have annuity interest rates become competitive with other investment products, but annuities also enjoy deferral of income taxation on earnings.
It is also interesting to see how those anti-Variable Annuity forces treat this as their predominant weapon, it seems, is harking on the fees. One organization on the internet insists that the average is 2.2 percent of the assets each year. Where this came from is unknown, as recent figures indicate that it is much like 1.3%.
As long as we are talking about "money-monkeying," often securities salespersons proclaim that the annuitant will owe ordinary income taxes on every dollar of annuity withdrawals. And then they run some figures showing how much the investor would save if he only had to pay capital gains taxes.
So, let's take a look at something that has been "forgotten" in this discussion:
The “Exclusion Ratio” applies to all annuities, but Variable Annuities have their own situations and rules—obviously because the exact amount of payout cannot be predetermined exactly as it can with the fixed annuity. The amount of each Variable Annuity payout can fluctuate which makes it impossible to determine the total benefits expected. However, assume an Individual had paid premiums of $90,000 and expected to receive payments for 20 years. Dividing $90,000 by 20 years, results in $4,500 per year—representing return of premiums only. Then, for example, if the earnings on the account resulted in the annuitant receiving $6,000 for one year, $1,500 (“interest” paid over and above the $4,500 base) would be taxable. If this annuitant received only $3,000 for one year, none of it would be taxable since it all represents return of premium, no interest. With a Variable Annuity, the exclusion could be recalculated when payments change, following IRS procedures.
Did you pick up on the statement that the portion of the payments that represents return of premium (at no interest) is non-taxable?
RULE: IF ONE PRODUCT IS COMPARED TO ANOTHER PRODUCT, MAKE SURE THAT IT IS A LEVEL FIELD AND NOT "APPLES-AND-ORANGES."
Another point that these harbingers of doom (running out of descriptive terms) bleat is that beneficiaries will be saddled with paying capital gains tax on any profit that the annuity generated. This is (? ) a big disadvantage as if the money had been in mutual funds, (for instance) the kids wouldn't have to pay taxes because of the step-up in basis. Okay – pay now of pay later. And while there is some point to the heirs having to pay capital gains taxes, if the money comes from an annuity, then ordinary income tax would be payable only on, (to repeat) the gain, not on the original premiums that were paid. Interestingly, an agency with a web page on the internet stated that if an annuity was funded with $50,000 and at time of annuitization it had grown to $75,000, the heirs would owe tax on the $25,000 in profit. Further, it is contended that if the money had been placed in taxable mutual funds, because of the step-up basis, the kids would get that $25,000 tax free. Kowabonga – big tax advantage. The problem is that during the period of growth, taxes were paid on the growth. Pay now or pay later…
In attempting to pooh-pooh the death benefit, it was stated that the death benefit was "pointless or superfluous." Bet it isn't pointless or superfluous to the heirs!
With a Variable Annuity, an insurer guarantees that heirs will receive at least the contributions made into the annuity, less any withdrawals, even if the account later drops in value. So, if you invest $100,000 in an annuity and the account is worth only $80,000 when you die, your heirs still receive $100,000. That is really painting a death mask on the product. But be prepared as there are those scholarly types that comes up with formulae which indicates that the guaranteed minimum death benefit at 5 or 10 basis points per year, depending upon the wording of the death benefit provision. Quoting unintelligible formulae (what would you expect from a college professor…) it has been trumpeted that the death benefit is overpriced.
Okay, maybe so. The old story comes to mind where a prospect asks a life insurance agent exactly how much premium should he pay for life insurance so that he will pay in premium only what he gets in death benefit. The agent says, "I can tell you exactly how much you should buy. All I need is your date of birth and your date of death." 'Nuff said.
Before we quit discussing the advantage of the death benefit, there is one feature that should always be disclosed—the death benefit may expire at annuitization. This feature should always be disclosed so check it out. Depending upon the annuity and the company, this may be avoided as the company should have some method to keep the death benefit in force. After all, who writes Variable Annuities? LIFE insurers.
However, if the annuity owner is not happy, it may be possible to transfer the money directly into another annuity company without triggering taxes (a Section 1035 exchange). Tax laws change, but usually if you transfer from one plan to a like plan, there will be no taxation. However,
RULE: ALWAYS KEEP ON TOP OF TAX LAWS THAT AFFECT THE PRODUCTS YOU MARKET, IN PARTICULAR (IRS TAX CODE) SECTION 1035 EXCHANGES.
Therefore, let us take a longer look at annuity 1035 exchanges:
This subject has been approached previously, but deserves more detail and some repetition.
Any income tax on an annuity or insurance contract that has been distributed from a qualified plan can be postponed by converting the annuity or insurance contract to a “nontransferable” annuity immediately (according to recent action by the IRS, although within 60 days is still in the regulations – but why take a chance?). Current taxation on the qualified distribution can be avoided if it is rolled over into a regular IRA.
Once the funds have been deposited into the IRA, taxes will not have to be paid on the rollover until the IRA starts to distribute its assets. Any lump sum distribution will be taxed as ordinary income, and any annuity distributions will be taxed as previously discussed.
A partial distribution to an employee of the funds held in their account may be rolled over into a regular IRA unless (1) the employee reaches age 70 ½, (2) payments will be made for 10 years periodically or for the life expectancy of the employee, or (3) the amounts are not included in the gross income in the absence of the roll over.
A nonqualified annuity may be exchanged for another annuity tax free, provided:
The IRS has held that the direct transfer of an entire annuity contract into another preexisting annuity contract qualifies as a tax-free exchange under Code Section 1035.
The following rule is not only a rule to keep you out of trouble, but it is also definitely a marketing aid. For instance, depending upon the annuity, the annuity owner may be able to transfer to another like annuity but there may be penalties (surrender charges) involved.
RULE: NEVER, EVER, ENTICE AN ANNUITY OWNER TO TRANSFER TO ANOTHER ANNUITY—PARTICULARLY WITH ANOTHER COMPANY—UNLESS ALL PENALTIES ARE KNOWN TO ALL PARTIES.
There are certain situations where a second look may be needed, or at least a more detailed explanation to the client, if marketing a Variable Annuity. If a Variable Annuity is to be used in an IRA, make sure that the client fully understands that the tax advantages of a Variable Annuity loses some of its charm as the IRA has tax advantages on its own.
If a person plans on taking out a mortgage loan or equity loan on their residence in order to fund a Variable Annuity, be careful, be VERY careful. Regulators usually look askance at these situations.
If a Variable Annuity has a bonus feature, sort of a "blue-light special," be aware that regulators are not happy with these situations. There can be higher annual costs and/or a lengthened surrender period and you will have to do a lot of heavy explaining as to the advantages of replacement. Most states have replacement forms that ask some hard questions. This is not to say that you can never sell a bonus plan, just be careful, meticulously so. You may have to explain exactly why this is good for the consumer and if you do not have an iron-clad reason, forget the sale.
If your insurance carrier offers a stepped-up death benefit rider, make sure that it is explained in that way to the consumer. It is NOT "another kind of Variable Annuity."
Then there is the guaranteed benefit rider, which is usually available only on some of the older plans. Usually it is only available if the annuity is annuitized under the older contracts, but it does allow for a guaranteed stream of income for the life of the annuitant (something that is unavailable with mutual funds…)
It is not a good idea to represent a Variable Annuity as a "no-load" product because if the annuity is cashed in early, there are penalties, some of which can be rather severe. If it is compared to, for instance, a "no load" mutual fund, and the fact that the expense factor pays for the commission to the salesperson while the commission of the mutual fund salesperson is invisible(?), somebody has to pay for the efforts of the mutual-funds salesman. Somebody has to pay for the large homes in the gated communities in which they life and the BMWs that they drive…
Remember, there can be a severe tax penalty if withdrawals from an IRA (funded by a Variable Annuity or other type of plan) are effected prior to the annuitant reaching age 59 ½.
No matter what type of annuity you purchase, it is subject to a 10 percent IRS penalty for withdrawals of growth of income made prior to age 59 ½, and there “ain’t no easy way” to avoid it. No penalty is imposed on one's principal, i.e. the money put in by the owner is the owner’s money.
Didn’t say that there was NO way to avoid this penalty prior to the age of 59 ½. There just happens to be 3 ways to avoid it:
It makes no difference how old the annuitant (or owner) of the contract is, if they die then there is no penalty. Also, the IRS Code states that the penalty is waived if the annuitant (or owner) is disabled. Generally, it must be the death or disability of the annuitant, not the contract owner or beneficiary, except where the contract is owner-driven, in which case all IRS penalties will be waived upon death or disability of the owner.
If the contract is annuitized, it will avoid penalty, but such annuitization must be elected by the contract owner within one year after investing in the annuity. The age of the owner does not have to be 59 ½, indeed it is irrelevant.
The final way in which the 10 percent IRS penalty can be avoided is the contract owner being age 59 1/2 or older.
Because of these penalties, annuities are usually recommended for younger people unless it is part of a retirement plan such as an IRA or pension plan or profit-sharing plan. Of course, there is always the exception of the person who has sufficient funds so that they would not have to touch the funds in case of an emergency. Annuities are ideal candidates for the investor who is near or past age 59 1/2.
Unless the contract is “owner-driven,” the owner can be any age, from new born to 30, withdraw funds if they have to go into a nursing home or if they are diagnosed with a terminal illness. Some Variable Annuities offer "living" benefits, such as guaranteed accumulation benefits and guaranteed withdrawal benefits, such benefits would be available without the annuitant having to annuitize. The guaranteed accumulation benefit promise that at a certain future specified date the accumulation value will equal the original purchase price, even if the market was down. The guaranteed accumulation benefits guarantee that the accumulation value will equal the original purchase price in a down market, and would be stepped up in an up market which would be locked in to automatically increase the original purchase price. Other similar benefit may be offered.
Other annuities, such as Equity Indexed Annuities (EIAs), may work better if there is great concern about the market bottoming out. Without going into great detail here, these EIAs may solve the problem of consumers who want to take advantage of the increase in the market, but wants a floor in case the market tanks. The EIA is an insurance product generally, although there are brokers and advisers that market the product.
The NASD has proposed changes in marketing Variable Annuities which include specific requirements for sales practices including new suitability, disclosure and supervision provisions along with enhanced sales force training. The NASD cited the 80 Variable Annuity sales practice disciplinary actions over the last two years as the impetus for this increased investor protection warranted. Some of the changes that NASD has proposed should definitely be encompassed within the new rule changes:
A separate risk disclosure document must be provided to the investor prior to any sale and in addition to the prospectus (too often mailed to the client after the sale) because a potential investor is significantly more likely to read a brief and an easy-to-read disclosure document containing salient points regarding the mechanics of the instrument. As a result, such a document is an important element in the prevention of sales practice and suitability violations.
A comparison document must be made available indicating at least two low-cost alternatives to the Variable Annuity. This comparison would form the basis of review of the sale or exchange by the supervisor in the most tangible means. The NASD strongly feels that unless such comparisons are made available, investors cannot make reasonable and informed decisions regarding the purchase or exchange of the Variable Annuity product.
The Principal review should include a periodic review of the associated person's production report for Variable Annuity purchases and exchanges. This would allow the registered Principal to detect possible patterns of sales practice violations and other potential abuses that may not be revealed on other reviews conducted after each sale. Members should always review both recommended and non-recommended Variable Annuity transactions.
Hypothetical Illustrations used must not be misleading. Using mutual fund illustrations using the net asset value (NAV) of the parallel retail mutual fund should not be used instead of the accumulated unit value (AUV) of the Variable Annuity sub-account in illustrating hypothetical performance as the higher expenses inherent within the Variable Annuity would be misrepresented by using the lower cost mutual fund. Training programs, policies and procedures should ensure that hypothetical illustrations fully and fairly disclose all of the material features of variable annuities and sub-accounts.
This section discusses Viatical sales – an area of insurance marketing that is "fraught with danger." (It is combined with the discussion on Variable Annuities only because the two subjects can create a Chapter…)
An attorney (Donald Kohtz)—naturally—tells us that "Viatical" originates from the Latin word "viaticum" -- provisions for a journey. "A viatical settlement is an act by a person who is terminally ill of cashing in a life insurance policy to pay for the necessary associated illness, medical expenses, and final wishes. This terminally ill person contacts a viatical agent who bids the life insurance policy on the terminally ill person to the many viatical settlement companies. The package that is sent out for bids includes the terms of the life insurance policy as well as the medical prognosis of the terminally ill person. The viatical settlement company that is awarded the bid agrees to pay 50% to 80% of the face amount of the policy, varying according to the gravity of the terminally ill person's condition and life expectancy. The company also pays further premiums. In turn, the viatical settlement company sells the terminally ill person's life insurance policy to an investor who then becomes the policyholder as well as the beneficiary and assumes payment of the premiums of the policy. The purchase takes place when the terminally ill person is expected to live 24 months or less. Upon the death of the terminally ill person, the investor will receive 100% of the life insurance policy's face amount from the insurance company. The sooner the terminally ill patient dies, the higher the investor's return. While returns of 15% to 20% per year are typical for investors, the return can be substantially higher if the death of the individual was diagnosed as terminally ill. (Dictionary of Insurance Terms, 3rd Ed.)
Say, for example, that John Doe has a $100,000 policy when diagnosed with terminal cancer. A viatical company/operator may offer $50,000 to purchase the policy and be designated as its new owner (beneficiary). The viatical agent/company would then offer this $100,000 policy to a potential investor for $68,000. The estimated "term" (length of time before collection of the policy's face value) is usually the life expectancy of John Doe. The viatical operator would immediately pocket $18,000 from this transaction. T he investor stands to gain by paying $68,000 for a policy worth $100,000.
Typically, Viaticals are executed by recruiting applicants who already have a preexisting terminal illness, generally AIDS or cancer. Viatical settlement brokers, licensed agents, and representatives of viatical settlement companies, recruit applicants to apply for multiple "instant-issue" policies. They misrepresent the truth and answer "no" to all of the medical questions. Healthy impostors then undergo the medical examination and blood or saliva testing.
In many cases, the insurance agent who issues the policy is a party to the scheme. The agent or one applicant may even submit the same application to many insurance companies. The policies are then purchased by viatical settlement companies, which in turn sell them to unsuspecting third-party investors. The insurance industry is the biggest victim of this fraud and could incur huge losses (conservatively estimated at $1 billion+) within the next few years. However, some investors receive nothing in return for their "guaranteed" investment.
It may seem "morbid" for someone to choose this type of investment; however, viatical investments are legal and can result in high rates of return.
RULE: FULLY UNDERSTAND THE HAZARDS OF VIATICAL FRAUD AND KNOW WHO THE ORIGINAL INSURED WAS AND HIS HEALTH CONDITION. IF THIS IS NOT POSSIBLE, TO KEEP OUT OF TROUBLE, EITHER GET A GOOD ATTORNEY WHO CAN GUIDE YOU THROUGH THE WILDERNESS OF VIATICALS, OR FORGET THEM.
If the siren call of Viatical sales still arouses the instinct to market such a plan, then one must be, at least, aware of the dangers of fraud so that they can then make an intelligent decision as to whether they want to sell them, or not.
Historically, some insurance companies have offered an accelerated death benefits option which allows the insured an opportunity to receive up to 80% of the death benefit at any time within the last year of their projected life. The remaining 20% is then paid to the insured's estate.
On the other hand, the business of viatical settlements involves the selling of a policy death benefit, at less than face value, by a terminally ill person to a third party. This, by itself, lends itself to the possibilities of things "not being on the up-and-up." This transaction is accomplished, for a commission, with the assistance of a broker who offers the policies to settlement provider companies for bid, with the highest bidder obtaining the policy for resale to investors. The broker receives a commission based on the sale price.
The dollar amount of viaticated policies has skyrocketed in recent years. In 1990, approximately $80 million worth of life insurance was viaticated as compared to an estimated $1 billion in 1999, and estimates indicate that it has grown to close to $2 billion..
Fraud in the unregulated viatical settlement industry has become rampant; and experts in this field who have watched this growth with dismay, say that as much as 40-50% of the life insurance policies viaticated may have been procured by fraud. Experts estimate that investors have lost more than $400 million in these types of investments since the industry started in the 1980's. One corporation alone, charged with 155 felony counts relating to criminal fraud had bad policies with a face value of $12.7 million.
Dishonest persons who haunt the viatical industry procure policies by a practice referred to as "clean sheeting." This rather interesting term applies to the act of applying for life insurance while intentionally failing to disclose the applicant's status as being terminally ill. For an agent who often complains about his company's strict medical underwriting, this is difficult to understand. Basically many, if not most, insurance companies do not investigate the applicant or require any kind of medical documentation for certain smaller amounts, this way they avoid the underwriting costs .
Many insurance agents and brokers assist and often encourage viators in committing the fraud because it not only provides more policies than would be available though legitimate means—as the whole world knows by now, life insurance agents are paid "astronomical" first year commissions—but it also provides a much higher rate of return due to the fact they can be bought from viators so cheaply.
In a legitimate transaction, the ill person usually receives 50%-70% of the face value of the policy. However, a "clean sheeted" policy viaticated during the contestable period may offer as little as 10% of the face value because it carries the high risk of rescission, or cancellation by the insurance company, due to fraud.
After the policy is issued, the insured person will sell his policy—or in some cases with big-time operators, multiple policies from different insurance companies—sometimes within weeks, to a settlement provider using a broker. This is referred to as a "wet ink policy" because the ink on the contract is still "wet" when the policy is sold.
The odds against an individual finding out that he is terminally ill within weeks of buying a policy are exceedingly high. But when that happens over and over within a short period of time with the same broker or provider is a pretty strong clue that these policies have been "clean sheeted."
As is well known to life insurance agent, the policyholder can change beneficiaries whenever he wishes. Therefore, in order to hide the fact that the policy has been viaticated shortly after issuance, these con artists will obscure viatication by simply changing the beneficiary to someone at the settlement provider firm. Or they may just obtain a "collateral assignment" which is designed to facilitate an insured seeking a loan from a third party and using the death benefits of the policy as collateral. Of course, in these transactions, they pledge the death benefits but do not receive a loan.
Some settlement providers just delay reporting that the policy has been viaticated until the end of the incontestability period when they can no longer be prosecuted for fraud. While the incontestability period provides that the insurer cannot question a claim after the policy has been in force for two years, actually a claim at that time would be based upon fraud, but even though the insurer cannot withhold payment, the agent/viatical company has acted unethically and their every move will be watched closely by the authorities.
Still, there is a natural feeling that if the insurance company does not become aware of the fraud relatively soon after issue, they will "forget" the policy at claims time. A hallmark of these fraudulent agents is that they nearly always hide the viatication of fraudulently obtained policies from the insurance company for as long as they possibly can.
The incontestability clause for life insurance lasts for two years after issuance, during which time it may be rescinded by the insurer for fraud in the application. After this period ends, the insurer is obligated to pay the death benefit, regardless of any fraud in the application. Because policies viaticated during the incontestability period may be rescinded, they bring, as mentioned, a much lower price in the market.
A "pitch" to invest in viaticals would nearly always include the statement that your investment would produce a 100% return on your investments because you are assigned a specific policy with a face value of twice your investment and you can claim the face value-death benefit when the insured on the policy dies.
As an investor, you will have the option of reselling the policy once it becomes incontestable (two years after the date of the policy) for 70% of its face value.
If, for some reason, the policy is contested or canceled by the insurer, the promoters will provide you with a replacement policy through a "replacement policy trust" —which, coincidentally, is managed entirely by the promoters.
They represent viaticals as a better investment than stocks, mutual funds, annuities or CD's for a variety of reasons. To start, you will have full liquidity at the maturity of the policy from an "A" rated insurance company (?), and the transaction is tax advantaged and is entirely uncomplicated. You will receive the100% fixed rate of return which is fully secured by the policy. There is no risk to principal as this is completely safe, and to top it off, there are no loads or fees involved. If you get uncomfortable for any reason, or you need your money back, there are short holding periods with early buyout options. This whole thing is risk free, at no interest rate and there is no way to lose.
In addition they say you will be making a "humanitarian investment" because the terminally ill person will be able to use the funds to receive improved health care; pay off debts; take a vacation, reduce family stress, and enhance their quality of life. An experienced agent can bring tears to the most stoic as he describes the squalor in which the insured has been forced to live because of paying so many medical bills, etc. Oh years, on top of all this, you receive a Membership Certificate certifying that you are a member of Viatical Funding LLC.
After deducting the fees paid to sales agents, viator agents, and other intermediaries from your funds, you find that the ill person will actually be left with very little. If the investment is $45,000 for a policy with a face value of $90,000, the insured who so desperately needs financial assistance would receive, on the average, only $5,400, which is only 12% of your investment of $45,000, or 6% of the policy's face value of $90,000. Most investors just look at the fact that they can double their money—or receive a large amount— and they don't worry about what the insured receives.
On the fraudulent viaticals, it is not disclosed to the investor that the insured was terminally ill prior to being insured, such fact was not shown on the application and, therefore, the policy may be cancelled by the insurer during the incontestable period.
Instead of being designated as the sole beneficiary, the investor may discover that they share the policy benefits with creditors and family members. Further, the option to resell the ownership interests is not a guaranteed option, but just an assurance that they will "make an effort" to help you resell the policy. Regardless, it is not likely that the investor will receive the promised 70% or so of the face value, but only the amount another investor would be willing to pay.
And for some reason, they just "forgot" to mention that the risk of the insured living much longer reduces the annual yield—and miracle drugs are invented all the time. It also slipped their minds to mention that there is always the chance that the policy might lapse, or that the investor may have to pay the premiums on the policy for as long as the policyholder lives. They also neglect to mention that they are paid a commission, usually somewhere around 15% of the investment. And do they ever say who is eventually responsible for monitoring the health status and location of the insured and when he passes, to get a copy of the death certificate and making a claim to the insurer?
Viatical agents will supply investors with statistics that are intended to show the rate of return on the investment as based upon the life expectancy of the insured. A legitimate viatical firm will produce actuarial life expectancy reports. However, the con artists may use statistics that they develop themselves, of have some other person put down a bunch of numbers. There have been reports of statistics being furnished by a nurse and a plastic surgeon…
Incidentally, Viatical settlements are illegal under Canadian insurance legislation, so Canadians are not allowed to participate in such financial windfalls.
Financial Federated Title & Trust, and Asset Security Corporation pled guilty after being charged with conspiring to recruit insurance agents to defraud more than 3,000 investors while purchasing viaticated insurance policy investments over a three year period.
Another company, it was reported on the internet, American Benefits Services, was ordered to pay $129 million restitution on a corporate guilty plea in this case where the three companies fleeced people with promises of high returns on purchases of life insurance policies from the terminally ill.
Investors were told that their money would be used to purchase a beneficial interest in viaticated insurance policies, and that medical overviews were being performed on the insured persons whose policies were being bought.
Although at least $115 million in investor monies was taken in, the promoters used only $6 million of these funds to buy insurance policies with a total face value just over $7 million. They used the balance of the money for purposes totally unrelated to the purchase of viaticated insurance policies, such as the purchase of twenty-five houses in Florida, Vermont, South Carolina, Massachusetts, Georgia, and Toronto, two helicopters, thirty-four luxury automobiles, three motorcycles, several jet skis and boats and a Fort Lauderdale burrito shop.
A variant of this scheme, Personal Choice Opportunities, mislead investors when they sold viatical securities in the form of loan transactions. This is a little different situation as the investors are investing in an organization that purchases life insurance policy benefits from terminally ill persons. For loaning money to this firm, they would receive a return on their investment of 21-25% per annum.
The funds, however, were not used to purchase life insurance policies but those who owned the company simply kept the money. Over 1100 investors nationwide are believed to have invested $80-100 million in these transactions in just ten months. There has never been any credible evidence that this company has ever purchased any valid life insurance policies.
Life insurance premiums are based on actuarial tables using the very latest available data to determine the longevity of the policyholders, such statistics are obviously worthless in fraudulent applications. As it is often said, "Insurance Companies are not eleemosynary Institutions." They have responsibility to their shareholders and their policyholders. Fraudulent viatical schemes crate additional costs which must eventually be passed on to other policyholders.
This is not intended to say that the viatical industry are all "crooks" —to the contrary in a lot of cases they serve a necessary function. If, for instance, a young person is diagnosed with AIDS or some other lethal disease and he is the insured on his own life insurance policy that has been in force for some time, why, then, could he not sell the policy—it is a personal asset, after all—and receive a percent of the ultimate face amount that he can put to good use for medical and other care?
It is fair to say that when this industry started, it was initially the recipient of intensive investigations and regulations—as, obviously, it should have been. However, they have not done well in policing itself, and if the industry does not take drastic steps to rid itself of this disease of scam artists feeding on the ill and dying insured, then the industry will either be so strictly regulated that it would be difficult for anyone to make any money, or, the industry may be legislated out of existence.
For an agent contemplating selling viaticals or becoming involved in these transactions, he must be very aware that because of the fraud so prevalent in the industry that they would work under a microscope and they could invest a lot of time and energy into a business that may not exist in a few months from now.
Currently a person charged with viaticating a fraudulently procured insurance policy worth $100,000 face value, who stands to gain tens of thousands of dollars, faces the same penalty as a shoplifter who takes a pack of cigarettes in many places, such as 60 days in jail. More stringent penalties are needed, but unfortunately, the viatical industry has done a lousy job of self-policing and has not, as an industry, approached regulators for help at this time.
Actually, medical advances has created a new target for those involved in viaticals as those formerly with terminal illnesses may live much longer, therefore the industry has necessarily started targeting new clients, usually seniors who have life insurance and have considerable cash value in their policies, and who may be willing to sell their life insurance policies at a discount so that they can supplement their Social Security or take a vacation that was a lifelong dream, or help family members financially, etc. These are often called "senior settlements" as most of the policies that are purchased are on the life of a senior.
The owner of the policy gets cash and the buyer becomes the new owner and/or beneficiary of the life insurance policy, pays all future premiums and collects the entire death benefit when the insured dies. Simple. Much in the same line as selling mortgage loans to seniors who can take their equity out of their house to help them financially in their later years.
People decide to sell their life insurance policies for many reasons. Some common ones are the changed needs of dependents, a desire to reduce or eliminate premiums, and a need for additional cash to meet expenses.
As a general rule, states have not regulated life settlements as closely as they have viaticals. Certain aspects of these transactions may fall under the various Securities Acts so there can be financial risks involved when entering into such arrangements.
The seller/insured should be advised to contact a professional tax advisor to find out the tax implications as life settlement proceeds are generally not tax free. They should also know as a seller, that they will be required to provide certain medical and personal information to third parties who will be paid the proceeds from your policy upon your death. These third parties may sell your policy and pass along your medical and personal information to other individuals.
Typically, life settlements are offered to buyers, for resale to investors, at a discount from the death benefit. The discount is for the entire life of the policy, not an annual rate of return as an annual rate of return cannot be guaranteed. The rate of return depends, obviously, on when the insured dies, at which time the investor will receive the settlement. This is not, and could not even be considered to be, a liquid investment as no money is available until the insured dies.
The Alabama Securities Commission issued a Cease and Desist Order against Viatical & Elderly Settlement Providers, LLC (VESPERS) Washington, D.C., to stop conducting business in the state of Alabama after they received information that they were engaged in the illegal offer and sale of investment contracts involving fractionalized viatical settlement contracts there.
VESPERS, though not licensed to sell this type of security in the state, have solicited independent insurance agents to sell interests in viaticals issued by them with promises of low risk and high returns of 28-70 percent on two to five year investments for a 10% commission.
(From a published report and reiterated on the Internet)
05/01 – "Dr. Clark Carlton Mitchell, 43, a Miami Beach doctor working for Fort Lauderdale-based Mutual Benefits Corporation, one of the country's largest viatical settlement providers, has been charged with 25 counts of organized scheme to defraud and communications fraud for allegedly lying about conferring with the personal physicians of terminally ill policyholders before assessing their life expectancies. If convicted, he faces up to 150 years in prison and as much as a $130,000 fine.
Estimation of life expectancy is key in an investor's rate of return in a viatical investment and an improper calculation can be devastating to an investor. As a result, two dozen elderly investors may have been misled in their decisions to invest a total of $350,000.Many of the investors purchased the viatical settlements as part of a retirement plan.
Mutual Benefits was linked to the arrests a year ago of eight men on charges of submitting false information on eleven life insurance applications to get more than $1.1 million worth of coverage from various insurers.
The eight were then linked by investigators to the purchase of a total of 47 policies worth $4.9 million from 32 different insurance companies, which were then sold to viatical settlement providers, primarily Mutual Benefits, for more than $700,000.
Investigators said these policies first were "warehoused" with brokers and then marketed by Mutual Benefits to investors after the two-year "contestability period" had lapsed. These provider-companies then marketed the fraudulently obtained policies to unsuspecting investors.
Seven of the suspects are charged with one count of grand theft and one count of dealing in stolen property. They're identified as Ralph Cahall and Richard Fraher Jr., Anthony Marano, Guy Leopold, Albert Esposito Jr., Joel Seidman, and Edward Hoseclaw. The eighth was charged with an organized scheme to defraud and four counts of grand theft.
Mutual Benefits lost a court challenge to prevent the insurance department from examining its records where a preliminary review by the department indicated "obvious fraud" in life insurance applications on file with the company.
In Florida, there are eight viatical provider companies and about 90 brokers licensed to buy life insurance from policyholders for resale to investors, who then become the beneficiaries.
To date, the insurance department has executed seven search warrants and seized more than 1,000 viatical settlement files, representing more than $76 million worth of life insurance policies that investigators suspect were fraudulently obtained.
Anyone with information about this case or any possible viatical fraud scheme in Florida should call the Department of Insurance Fraud Hotline at 1-800-378-0445. A reward of up to $25,000 is offered for information leading to a conviction."
02/00 - Several companies and individuals who helped market to investors about $9 million worth of life policies that had been "clean sheeted" or obtained by hiding an insured's terminal illness from 53 life insurers were charged collectively with 240 counts of grand theft, organized fraud and dealing in stolen property.
Future First Financial Group Inc., a viatical settlement provider, and Future First's vice president, William F. Sweeney, 51, each were charged in one indictment with 81 counts of grand theft and one count of organized fraud in connection with the marketing of fraudulently obtained policies valued at $6.9 million.
Wanda Tappan, 56, the president of Life Benefit Services Inc., a viatical settlement broker; Bruna Coveleski, 54, the company's vice president; Stan Coveleski, 55, the company's chief financial officer; and, Joel Seidman, 44, a client representative, each were charged in a second indictment with one count of organized fraud, and a total of 72 counts of dealing in stolen property in connection with the sale of about $2.5 million in fraudulently obtained policies.
Last October, the officers of Justus Viatical Group, were indicted on numerous charges of organized fraud, grand theft and insurance fraud relating to some $3 million in fraudulently obtained policies which were bought by the company's two officers, and then resold to investors for some $2 million.
Future First in some cases paid the insured only 12% of the face value for policies it bought. For helping arrange the sale of just one policy for $122,746, Life Benefits was paid a $48,510 commission.
Suit seeks to recover losses from insurance scam - 1,000 Ohio investors lose; money laundering, fraud charges are filed
03/19/04 - AP- DAYTON - Victims of an alleged $20 million swindle hope they can recoup some of their losses as a court-appointed receiver tries to straighten out the mess.
``That was my life savings,'' Barbara McAdory, 61, of suburban Trotwood, said of the $72,000 she invested in policies sold by LifeTime Capital Inc. of nearby Miamisburg.
``Everything's down the drain now,'' she said.
The LifeTime founder and seven others have been indicted in Pensacola, Fla., on fraud and money laundering charges.
Brad Stockslager, 28, who came to the Dayton area to help his 93-year-old grandmother, said he found that $499,000 of her savings had been invested in portions of 12 life insurance policies. He said his grandmother must spend $3,000 a month for assisted care, not including medical expenses, and receives only about $1,800 a month.
H. Thomas Moran of Oklahoma City has been appointed receiver in connection with a lawsuit filed in U.S. District Court in Dayton by H. Thayne Davis of Edmond, Okla., who is seeking to recover $613,000 invested in policies held by LifeTime. Moran is seeking to recover money on behalf of an estimated 4,000 investors, about one-fourth in Ohio.
Among Moran's efforts, he said, will be seeking restitution on behalf of investors in the prosecutions in Florida and tracking assets of those accused of defrauding them. He plans to focus on the $157 million LifeTime portfolio.
Investing in life insurance policies of those near death emerged primarily as a result of the AIDS epidemic. Terminally ill people sold their life insurance policies to companies such as LifeTime Capital for a percentage of the face value, a deal called a viatical settlement.
The dying got cash to use in their final years, while the investors who buy the policies were told they could receive returns exceeding 60 percent if the dying -- called viators -- died within their projected life expectancies.
The lawsuit said most haven't died because an alleged ``sham'' company provided false life expectancies of viators.
Gerald Myers of Dayton, a certified public accountant, said he has six clients who bought LifeTime policies, including a couple in their late 70s who have their remaining life savings of $800,000 tied up in the policies.
``He has since gotten Alzheimer's and is in a nursing home under Medicaid,'' a program for the indigent, Myers said.
Miriam Gates, 64, of Dayton said the $18,000 she and her husband, Rufus, 68, invested in the policies ``was the only thing we had. It was like a cushion -- we knew it was there to draw on in hard times.''
Big Name Lawyer Involved in Lawsuit Against Viatical Scammer
LOS ANGELES - 08/06 - (AP) A high-profile celebrity attorney has settled a lawsuit accusing him of siphoning money from a $90 million death futures scam that one of his clients ran.
Attorney Robert L. Shapiro, who has represented O.J. Simpson, Christian Brando and other celebrity clients, reached the settlement Tuesday with attorney Barry A. Fisher, who was assigned to recoup the investors' losses from the scam.
Terms of the settlement, which was reached as jury selection was about to start in the civil case, were confidential. Fisher had been seeking at least $3.5 million.
In 1997, Shapiro represented David W. Laing, the owner of Personal Choice Opportunities Inc. in Palm Springs, which purportedly allowed the terminally ill to sell their insurance policies at less than face value so they could use the money while they were alive.
Personal Choice promised investors in the company 25 percent returns, but authorities said the insurance policies never existed.
Laing pleaded guilty to conspiracy to commit securities and mail fraud and served eight years in federal prison before his release a few months ago.
Fisher, who was appointed by the court to reclaim the investors' money, filed suit in 2001 accusing Shapiro of arranging for up to 12 bags, each filled with $500,000, to be taken from Laing's home in April 1997 so the defendant could post bail.
Fisher claimed in the lawsuit that Shapiro also took at least $200,000 of that money for attorney fees - although he should have known that the money was "illegally and fraudulently obtained."
Shapiro denied any wrongdoing, saying he had acquired the money from the sale of Laing's home and that his payment had been approved by a federal judge.
Fisher said outside court he has recovered much of the $90 million for investors, but about $15 million remains unaccounted for.
RULE: ENTER THE VIATICAL MARKET AT YOUR OWN RISK!
STUDY QUESTIONS
1. Not only have annuity interest rates become competitive with other investment products, but
A. at the present time a fixed annuity beats any other investment product.
B. annuities also enjoy deferral of income taxation on earnings.
C. annuities also enjoy the elimination of income taxation on earnings.
D. Variable Annuities may be marketed only by insurance agents.
2. The Exclusion Ratio
A. applies to all annuities.
B. applies to all annuities except Variable Annuities.
C. only applies to Universal Life products.
D. only applies to indexed products.
3. Section 1035 of the IRS Code pertains to
A. all income from annuities.
B. exchange of policies without taxation.
C. the taxation of all insurance policy exchanges.
D. IRS penalty for early withdrawal of the funds of an annuity.
4. No matter what kind of annuity is purchased, it may be subject to a 10% IRS penalty
A. for withdrawal of income prior to age 59 ½.
B, when the building up of the cash value or investment part exceeds 105% of the premium paid in.
C. if it is being substituted or exchanged for a like annuity.
D. on the initial investment for the first year.
5. One of the problems in the past with viatical sales is
A. often the insurance agent who issues to the policy is a party to the scheme.
B. that it is unprofitable and no legitimate company offers it any longer.
C. that the agent must hold a securities license.
D. the market only attracts those with HIV-AIDS.
6. When a life insurance policy applied for and there is intentional failure to disclose the applicant's status as being terminally ill, this is called
A. wet ink policies.
B. Section 1035 underwriting.
C. an ERISA plan.
D. clean sheeting.
7. Fraudulent viatical schemes affect the "legitimate" life insurance business
A. to such a miniscule extent that rarely is there any legal action taken against them.
B. as they put the agent in such a high income bracket that the legitimate agent may stop writing insurance and just sell viaticals.
C. because they actually show how much better an insurance policy is for investment purposes so more life insurance is marketed.
D. as insurers have to make up for their losses due to these schemes, which drives up the cost of insurance to legitimate policyowners.
8. The insurance industry has counterattacked viaticals to some degree by
A. firing any agent that has ever sold viaticals.
B. offering life settlements which allows seniors to sell their policies at a discount.
C. hiring their own investigative staff to investigate every viatical plan.
D. just ignoring the problem and hopes it goes away.
ANSWERS TO STUDY QUESTIONS
1B 2B 3B 4A 5A 6D 7D 8B