Saving You Money For Life

We wrote earlier about the speculators who have developed a niche buying life insurance policies from older people for a cash payment, retaining the policy and maintaining the premiums, and then collecting on the policy when the insured individual dies.

Apparently it’s developed into a full-blown scam that has the life insurance industry indignant. Today’s case study is Mr. Marvin Margolis, an 80-year-old Manhattan financial consultant who is described by the New York Times as “looking for investors willing to bet on when he will die.”

Two years ago Mr. Margolis bought a large life insurance policy. Now he’s considering selling it to a group of investors; a deal that should give him as much as $2 million to enjoy in his final years. In return, the investors will get the policy’s $7 million payout when he dies – which they hope will be soon, so they can stop paying his premiums.

Policies like Mr. Margolis’ cause particular concern. It was originally paid for with a loan from speculators who will get their money back, plus a profit, if it is sold to another group of investors, according to public documents. Even if Mr. Margolis does not sell, the loan will be repaid from the death benefit when he dies. In this instance, there are two groups of sharks circling the willing prey.

Insurance executives say transactions like Mr. Margolis’ may cripple their industry and make it harder for the average senior to buy life insurance in the first place. While that seems a benevolent concern, a look at the cash-flow structure of the life insurance industry indicates otherwise. It seems that life insurance is a healthy industry because it is not called on to deliver on a huge portion of the policies that are written.

Life insurance companies rely on policies lapsing before the policyholder dies. Last year, insurance companies reduced their financial exposure by $1.1 trillion when 19.8 million policyholders stopped paying premiums, according to the Insurance Information Institute. By comparison, the industry paid death benefits on only 2.2 million policies.

You can leave a response, or trackback from your own site.