Thursday, April 30, 2009

Life insurance flipping is a controversial and disturbing practice


David S. Hilzenrath has a couple of stories in the Washington Post Wednesday and Thursday about viatical life insurance settlements (SEC link here), the second of which, “Senators Decry Flipping of Life Insurance Policies” appeared today on p A17, with this link. Apparently, the Chicago Tribune recently hosted an advertising event, “WHY WALL STREET WANTS TO BUY YOUR LIFE INSURANCE POLICY.” Life insurance settlement companies approach people with short life expectancies and get them to surrender their policies for cash. Then the companies make more money that would have been paid to the beneficiaries.

One possible use of this device could be to pay more nursing home or eldercare bills, without going to Medicaid. Possibly states could require people to do this. That also means that heirs (usually adult children) will not receive proceeds upon death, but in the case where money is needed to pay for care, this would sound right, and in line with the likelihood that many states will clamp down in the way they implement filial responsibility laws.

A related practice is “stranger-originated life insurance” where companies encourage the elderly to take out policies just for companies to buy and flip. Ohio, for example, recently prohibited the practice.

Viatical settlements became somewhat popular and controversial in the 1980s when people with AIDS settled their policies during the last months of their lives, before medications that could greatly increase life spans were available.

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