Buy Insurance on the Life of Another! Good Business for all or a Scam?

Posted on February 9, 2009 by Gavin Craig

The Minnesota legislature is looking into what has become a very big business. In summary, the life insurance companies want to ban the practice, whereby a policy holder/owner sells the right to collect the death benefit for a payment now. The practice is legal and even international in scope. Thanks to the Minneapolis Star tribune for the report. 

In essence, a person can purchase life insurance when elderly, make the initial deposit, and then sell the rights to collect on the policy. The policies then become assets that are bought and sold, bundled with other policies, and traded. The Insurance companies don't like them even though the insurance company gets exactly what it bargains for. The premiums. The insured gets what they bargained for, the policy on their life, and when sold they receive a payment for the buyer. The sellers receive a percentage of the death benefit for cash now instead of the estate or beneficiary receiving the payout when the insured dies.

The buyer pays the premiums until the insured dies. This of course means that the insured will not let a policy lapse after they can't afford it anymore. The insurance company keeps all the premiums it receives, and never has to pay on a lapsed policy. So, the number of large policies lapsing will be reduced: and the profits are reduced.

The insurance policy is a contract, and the policy owner should have the option to sell their right in a contract. It will be interesting to see what the legislature does with this issue, because the market is international, not just in Minnesota. I don't see how the state can regulate a market that they can't control. Also, people should be able to sell there contract rights: it is the American way.
 

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From The "Nice Try" Department: When is a Mistake not a Mistake?

Posted on August 5, 2008 by Gavin Craig

Usually people enter into contracts because they want something, i.e. goods, services, money etc. What happens when the deal turns out to be unfair? In a recent case from California, the court found that the contract meant what it said. The facts are simple: Jean Simes purchased an annuity from United of Omaha Life Insurance Company and paid a single premium of $321,131. The annuity would pay her $3,000.00 per month for the rest of her life. Less than four months later Jean Simes discovered that she had overran cancer, and died a week later.

Apparently no one notified the defendant because payments continued for another 3 months. Needless to say, the heirs were upset, and they sued for the return of the premium. From the facts of the case it appears that the plaintiff’s filed a complaint alleging every conceivable basis to nullify the contract, asking for recession, alleging fraud, breach of contract, and mistake. From the facts of the case Jean Simes had no idea that she had cancer when she contracted for the annuity. In the end, after motions, the plaintiff’s were down to one argument: The deceased was mistaken because she didn’t know that she had cancer, and therefore the contract should be canceled and the premium returned.

In California, and I think most other states would reach the same conclusion, the court determined that Jean Simes assumed the risk that she would died before she would recover her premium, and the defendant took the risk that Simes would live a long life. That is the very nature of an annuity.

The court concluded that even though the deceased was unaware that she had cancer, that fact alone is not a reason to nullify the contract. She had received everything that she had bargained for: an annuity for the remainder of her life.

When an insurance company sells an annuity, isn’t it betting that the recipient will die sooner rather than later? The sooner the recipient dies the more money the insurance company makes in the end. This is the opposite of the life insurance policy where the insurer is betting that the insured will live a long life.

Despite arguments to the contrary, the failure to know your health condition is not a "mistake" that justifies rescinding a contract to pay a benefit for a lifetime.



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