From Quatloosia > June-July
Seems like people will figure out how to make a buck out of anything.
Lately, this includes death. Don't get me wrong: Since the dawn
of man a lot of people have been making a lot of money on death.
Death sells, for the reason that it is the big unavoidable. Morticians
and those who sell burial plots are getting ready to go through
their biggest up cycle ever as the baby boomers start cashing it
in. And life insurance has always been a very lucrative business,
though the trouble with life insurance is that you actually have
to die to reap the benefit of it.
Not anymore. Seems like some very bright people have figured out
a way for you to make money on your life insurance before you die.
No, it does not involve being placed into a time machine and being
teleported to some future date right after you've been lowered into
the ground where you collect on your own policy and then get zapped
back to the present where you can spend it. It doesn't involve you
faking your death, either.
Nope, these very bright people have figured out a way for you to
make money on your own death before you die, in a way that doesn't
involve fraud or teleporting. To the contrary, they will show you
how to create vast amounts of cash - hundreds of thousands of dollars
if not more - seemingly out of thin air without you having to do
much than take a medical, signs some forms, receive the check, and
then of course at some future date die at your leisure.
The one sure thing about anything this good is that it is sure
to get a bunch of other folks all riled up, and indeed this strategy
has of late come under some serious scrutiny with some other very
bright people claiming that there are some significant and hidden
downsides to the strategy. What? You can't get something for nothing?
If it is too good then it is not true?
Somewhere between the very bright people who claim that you can
make money off your death before you die, and the very bright people
who claim that you can't, lies the truth. To find that truth you
must first understand the concept of a "life settlement", and to
understand that, you must understand what its immediate predecessor,
the "viatical settlement" are all about.
Let's say that you are diagnosed with a terminal illness, such
as serious cancer or AIDS, but you don't have sufficient money for
treatment or even to keep yourself comfortable until you die. But
let's say that you do have a life insurance policy, although in
such a case you'll find that it does you pitiful little good until
you do cash it in. So, you find somebody who will buy your insurance
policy now at some reduced value, knowing that very shortly they
will be able to cash it in. This gives you the money for treatments
to hopefully slow the progress of your disease and also maybe keep
you somewhat comfortable until you finally kick the bucket.
From the investors' perspective, they have examined your medical
records and prognosis and know with some certainty (depending on
what you have, and how bad it is) that you are going to die within
a couple of years. When you die, the investors know that your life
insurance policy will now pay them as the named beneficiaries, so
they will get the money that they paid you for the policy plus some.
It is then just a simple matter of taking their total profit on
the policy, and dividing it by how many years you actually live,
and that is their return on their investment.
So, let's say that you have a $300,000 life insurance policy, your
oncologist tells you that at best you have two years to live, and
so the investors pay you $200,000 for it and you name them the beneficiaries
of the policy. If in fact you die in two years, the investors will
have made a profit of $100,000 split over two years, or what amounts
to a $50,000 per year return - although this will be a pre-tax profit
and income taxes will be owed on it. Still, not bad for a $200,000
This type of investment in the life insurance owned by a person
who is probably soon going to die (with "soon" being somewhat arbitrarily
set as being within three years) is known as a "viatical settlement".
In the 1980s, there was created almost overnight a multi-billion
industry in investing in the life insurance policies of AIDS patients,
and later this industry spread to cover terminal cancer patients
and in fact nearly any other disease where sure death was a soon-to-be-realized
The fly in the ointment for investors is of course that you might
outlive your physician's prognosis, meaning that when the Angel
of Death came for you at the appointed time you told him to take
a hike and don't come back until much later. This danger, from the
investors' view, arises primarily from advances in medical technology.
What might have been sure death a couple of years ago, might become
defeatable or at least put into long term remission.
Such was the case with many of the AIDS patients. As medical technology
progressed, some of the patients start living longer while with
others the AIDS went into remission altogether and they are still
alive. Doubtless, there are few investors out there who have been
waiting a couple of decades now to cash in on the life insurance
policies that they long-ago bought, and there probably are not just
a few cases where the AIDS victims have now outlived the investors
in their policies.
Eventually, the same thing started happening with cancer patients
who also refused to cash in their chips at the appointed time, and
investors were no longer willing to take anything but the very worst
cases, where no advance in medical technology was going to make
a difference. This selectivity started causing a lot of fraud in
the viaticals market, as people who actually weren't very sick at
all started portraying themselves at death's doorstop and repeatedly
sold policies on their own lives. Then, some viatical fraudsters
simply collected money from investors and never even invested in
policies. This and similar fraud caused the viaticals market to
be viewed as very sleazy (as if dealing in death wasn't sleazy enough
in the first place), thus inviting state regulators in to further
muck up the process with red tape, and driving would-be investors
out. More on viaticals fraud at http://www.quatloos.com
So the viaticals mess left a multi-billion dollar business with
relatively few real victims of disease to buy policies from. But
one of the great things about America is the ingenuity of our capital
markets, and their ability to not just let money sit around but
to put it to work. It was just about when the viaticals markets
were starting to fall apart that some very bright person looked
at the situation and said,
"Hey, what about people who aren't terminally ill, but whose
health has gone down since they originally bought their policy?
Since the insurance companies are prohibited from lowering benefits
to reflect their poor health, their policies are worth a lot more
than their surrender value."
Thus was born the concept of investing in the life insurance policies
of the elderly, or what is known as "life settlements".
Assume that you have an old codger who is 65 and had a significant
decline in health, such as a stroke or major heart attack (their
medical records include physician's comments to the effect of "one
foot in the grave" or "quite surprised to see him again"), but who
once upon a time bought a $1 million life insurance policy. The
old codger has since raided all the cash value out of the policy
to fund his medical treatments and early retirement. Indeed, because
of his age the cost of insurance is now rapidly increasing meaning
that the old codger will either have to put more money into the
policy or it will expire anyway. His problem is that he doesn't
have any more money to put into the policy unless he borrows against
the equity in his home or something, which he really doesn't want
Keep in mind that by this time the old codger has forgotten what
he bought the life insurance for initially, which was both for tax-free
growth and to leave something for his kids. Because it no longer
has cash value for him to access, and because he has forgotten that
it will pay out a large amount of money to his kids if he keeps
it up, it to him is a wasting asset that he would love to get rid
of. The life insurance has basically become a "What have you done
for me lately" sort of investment, and thus emotionally the old
codger is much more willing to hold it than, say, stock in IBM which
hasn't paid him much in the way of dividends but still has dramatically
appreciated in value.
A quick glance at your handy pocket guide to Actuarial Tables &
Life Expectancies reveals that the old codger is supposed to die,
on average, within five years. So, you go to the old codger and
say, "Hey, I'm willing to buy your life insurance policy from you
for $500,000 paid immediately." From your viewpoint, this is a good
investment. If he cashes it in by 70 as predicted, then you get
paid $1 million on the policy, meaning that you've made $500,000
over 5 years (less any premiums you have to pay to keep the policy
up). In round numbers, this is a $100,000 per year pre-tax profit
on your original $500,000 investment. That 20% annual pretax return
doesn't look too shabby against current interest rates, and the
insurance company is arguably much more solvent than any bank. Gosh,
even if the old codger lives to 75, it's still not a bad investment,
since then you're still making 10% per year. And the odds of the
old codger living past 75 (and giving your corporate bond like rates)
are somewhat offset by your hope that he will cash it in before
70 meaning that you made a wonderfully nice profit.
As an aside, most of the investors in life settlements are large
financial firms and hedge funds who are looking for something that
has at least the safety of high-grade corporate bonds, but with
a high return (since bond yields are still intolerably low). These
firms buy many, many life settlements and pool them together. While
these firms can not, of course, predict when a particular old codger
will finally kick the bucket, they can employ the Law of Large Numbers
to get a pretty good actuarial feel for when most of the policies
will pay, thus allowing them to calculate their expected yield for
the pool - and sell slices of the pool to investors looking for
safe, higher yielding investments.
Who Loses With Life Settlements?
From the old codger's viewpoint, it is a great deal for him too.
Since he couldn't afford to make current payments to keep the policy
up anyway, in his mind the value of the policy was a precisely calculated
"$0". And here you come along and give him $500,000 hard cash for
Wait, you say, how can this "win win" situation be? Not everybody
can be a winner in a transaction, right?
Absolutely right. In this situation there is a loser, and a big
loser too. It is the old codger's kids. Had the old codger kept
the policy alive, his kids would have been big winners at his death
- just like the investors will be, and even more so since unlike
the investors the kids will not have to pay income taxes when the
policy pays off (although the old codger's estate may have to pay
federal estate taxes, depending on what happens with estate tax
In other words, if this transaction makes so much sense for the
investors, it makes even more sense for the old codger's kids. Basically,
the old codger is giving up a very valuable future asset for basically
pennies now - it is simply not a good trade. However, few of the
life insurance salesmen tell their clients to engage in life settlements
really work to advise their clients that it is a bad trade to settle
their life insurance policy instead of keeping it alive.
To an extent, the insurance company is also a loser. The reason
has to do with what is called a policy "lapse", meaning that the
insurance company receives premiums but does not have to pay out
on the policy. Anytime a policyholder doesn't keep a policy up,
there is a lapse. Suppose the old codger did not sell his policy
to the investor, but simply let it lapse. In that case, the insurance
company would have collected premiums from the old codger for years,
but in the end never paid out any death benefits to the old codger's
Policy lapses are sweet money for life insurance companies, and
do impact their profitability. A life insurance company can make
a bunch of bad underwriting bets but still be profitable if lapse
rates are high enough. Indeed, there are some industry analysts
who suggest that some life insurance companies are only profitable
because of their lapse rates.
Life settlements can theoretically work to reduce lapse rates,
because the investors who buy the policy will always contribute
just enough money to keep it paid up until it pays off. If enough
people hear about life settlements and sell their policies before
they lapse, the lapse rates would go to zero and the life insurance
companies would be forced to raise rates. This would make life insurance
less competitive against other investments, and probably lead to
But if you think that any of this causes the life insurance companies
to worry, you're wrong. Life insurance companies know that any loss
of sales due to higher premium rates will probably be more than
offset by the greater sales due to people who start buying life
insurance policies as investments with the thought of later selling
the policies to fund retirements. Life insurance companies had always
been somewhat embarrassed by lapse rates anyway, since they tended
to indicate that policies had been improperly sold in the first
place. Also, life insurance actuaries already assume that a certain
number of policyholder's will have health declines, and thus will
hold their policies until their death. From an actuary's standpoint,
the concept of life settlements in causing losses to the insurance
companies isn't nearly as onerous as the insurance agents try to
paint it out to be when making a sale.
Finally, the life settlements markets are limited to a relatively
small part of the market since they are only for people over 65
and who have had a dramatic health change. This group probably represents
less than 0.5% of all life insurance policies, so life settlements
probably are not going to impact life insurance profitability that
much. It is, however, an argument that life insurance agents falsely
use to try to portray the insurance companies as the big losers,
and not the kids of those who are selling their policies.
Problems with Life Settlements
The point is that a life settlement is only a good deal for folks
who have no beneficiaries or estate needs of any kind. If you take
into both family and charitable aspirations, this is a very small
market. If an old codger has heirs that he wants to benefit, or
any other estate needs, then life settlements are not a suitable
strategy. Instead, the old codger should do anything he can to keep
the policy going, just like the investors would do if they got it.
So, there are several significant problems with the life settlements
market, and all of this discussion is just my way of meandering
around to give you some background on life settlements so that we
can discuss those problems.
The first problem is that some bad guys in the life settlement
market cannot leave well enough alone. Because there simply are
not enough seniors who are situated like the old codger, i.e., have
a large life insurance policy that they cannot afford to keep up,
these bad guys look to basically "grow" future life settlements
by arranging slick-sounding deals to encourage people who don't
even have much life insurance yet to buy life insurance with the
idea that later they will sell it. With these arrangements, known
as SOLI (short for "Stranger-Owned Life Insurance") life insurance
truly does become a pure investment with the policies grown like
so many fields of corporate bonds awaiting future harvest.
SOLI is a hot topic product right now among many life insurance
agents who cater to wealthy people, since they can be pitched that
they can get a very high level of insurance for two years (thus
allowing the policy to mature past the noncontestability period),
and then also make a tidy profit up front just for engaging in the
transaction. If they don't have the money on hand to buy the life
insurance policy up front, that's still no problemo as the
investors will loan them the money, subject to taking the policy
after the two years in repayment of the loan. This means basically
Free Money (!!!) for those who allow life insurance policies to
be bought on their lives.
The problem here is that this is precisely the sort of thing which
can - and should - draw Congress' attention to allowing life insurance
to grow tax-free. Why these life insurance policies are allowed
a tax-free build-up is anybody's guess, since they really are a
pure investment that have little to do with protecting the family
from the insured's death. Indeed, because of insurable interest
requirements for the initial issuance of the policy, most of the
people who are approached to engage in this type of transaction
already have a large enough estate that they don't need these policies
to protect their families, and indeed are almost immediately cashing
out of them. In these situations, the life insurance really is no
different than a corporate bond, and there really is no sensible
reason that they should be taxed much differently.
What is happening is a recognition that wealthy people have a hidden
asset, which is their insurability. The bum at the bus station can't
qualify for $5 million in life insurance, but many affluent and
nearly affluent Americans can. If somebody has an estate worth $5
million, then they have an insurable interest of at least that.
So why not take that unused asset and make some money off of it,
Whether buying a lot of insurance makes financial sense for a person
depends on a lot of factors, including their age, health, and what
the internal rate of return will be. But when it does make sense,
wealthy people should be taking advantage of their large insurable
interest by purchasing as much life insurance as they can reasonably
afford so as to either pay estate taxes or to further grow their
estate (income tax free) for their children.
Most wealthy people will not do this, of course, because they generally
don't like life insurance no matter how much financial sense that
it makes. What SOLI does is to turn this dislike of life insurance
on its head so that wealthy people think that it is cool that they
are not only making money but also selling a policy they
never really wanted to these crazy investors.
But in reality it is the wealthy folks who are stupid, and the
investors who are smart. On a $10 million policy, a wealthy person
might get $500,000 for selling their policy, but the investor will
get $10 million on their death, less this $500,000 and any agent
commissions, plus maybe a couple of million in keeping the policy
going until the wealthy person kicks the bucket - at which time
they might make $6 or $8 million in pure profits. You decide who
is smart and who is stupid.
If the wealthy people were really smart, they would simply buy
as much life insurance as they could and hold it until their deaths.
If they didn't have the cash on hand to buy it, they could always
use the services of many lenders who are willing to finance the
premiums with the loans being paid out of the policy proceeds at
death. These days, many lenders are even willing to make these loans
on a non-recourse basis, meaning that the policyholder is not even
personally liable for the loan (the policy is used as security for
the loan until the loan is paid off at death). But as discussed
above, wealthy people let their dislike of life insurance (or maybe
of life insurance salesmen) get in their way of what would be a
really good investment for their families.
The Hidden Suitability Issue
This leads us to the most significant problem involving life settlements,
which is suitability. Usually, the issue of suitability relates
to the agent selling a senior something which they don't need. Here,
the suitability issues relates to the agent incorrectly advising
the senior to sell something that the senior should be holding.
In many ways, it really is no different than if the senior held
a Certificate of Deposit that would pay $10 million in ten years,
and the agent came and convinced them to unload the CD now for only
$1 million. What the agent might argue is that the senior was cash-tight,
and needed the $1 million now for cancer therapy. In that very limited
case, the agent's advice might be correct. But how about if the
senior didn't even need the $1 million because the senior had other
cash available? In the latter case, the senior would not be deemed
to be suitable for the sale of the CD.
In fact, at a speech given May 25th at the NASD Spring Securities
Conference, Mary Schapiro, the Vice Chairman and President of the
NASD, stated that the NASD considers life settlements to be "securities,
subject to firm supervision." If, as the NASD thinks, life settlements
are securities then that raises a wide variety of issues, including
suitability and whether the life settlement sold must be accompanied
by an offering memorandum or prospectus just like any other security.
Certainly, all of this opens the door for securities litigation
whenever a life settlement is sold - and perhaps most likely against
the agent who acts as a de facto securities broker in encouraging
the senior to sell. In some states, such as California, one must
also wonder whether so-called "senior abuse" statutes might come
into play where seniors are being encouraged to sell their policies
when they have the ability to continue to fund them.
What goes on in a lot of these cases is that the insurance agent
who is encouraging the senior to sell his life insurance policy
by way of a life settlement is then also encouraging the senior
to "replace" their life insurance needs with a new policy. While
this puts the insurance agent into a wonderful double commission
situation where they are making money both selling the old policy
and buying the new one, it usually makes little sense. The reason
is that the insurance costs of the new policy will almost always
be higher than that of the old policy, simply because the senior
is now older and more importantly, much less healthy than when he
bought the original policy, so he will be in a higher "risk" class.
In other words, the insurance agent is telling their senior to
sell a perfectly good policy and replace it with a crappy one. This
is usually bad advice, since if the senior was really smart he would
put enough money into his old policy to keep it alive, and then
use whatever remaining excess liquidity that he has to buy as much
more life insurance as he can afford and the underwriters will let
A must-read recent study by Deloitte Consulting LLP and the University
of Connecticut discuss the typical higher insurance costs of the
replacement policy, see The Life Settlements
Market: An Actuarial Perspective on Consumer Economic Value,
/uconn_deloitte_life_settlements.pdf This study concluded
in part that at least half of the policy value will be lost by the
super-high transaction costs, which exceed by many multiples the
transaction cost of selling any other financial asset.
The Insurable Interest Problem
As egregious as the life insurance agent's conduct sounds, many
of them are starting to tell their seniors that they can repeat
this process "every two years" which leads to the next problem,
that of insurable interest.
The concept of insurable interest means that you have something
worth insuring. In addition to other things, this keeps people with
nothing to lose from buying a lot of life insurance and then suddenly
being found dead. The concept of insurable interests is why the
bum at the bus depot can't buy $5 million in life insurance, but
the person with a $5 million estate whose heirs will need the money
to pay estate taxes and other costs can.
The problem with insurable interest is that even though it grows
with the wealth of the policyholder, it is still finite. Just as
one cannot buy $5 million in life insurance on the bum at the bus
depot, one cannot buy $50 million in life insurance on somebody
who only has a $5 million estate. Yet, that is exactly what is happening
with many of the life settlement deals where a portion of the money
is being used to buy new policies.
What goes on to avoid the insurable interest issue is tantamount
to fraud, as the insurance agents who fill out the applications
either fail to disclose the existence of other insurance, or they
inflate the value of the senior's wealth. While in the past the
life insurance companies have not paid much attention to the issue,
they are now redrafting their forms to pick up these instances of
multiple sales of life insurance to a single senior.
A significant risk for wealthy people who engage in these transactions
is that their estate could lose - big. If a life insurance company
later decides to challenge the insurable interest issue and wins,
it means that the life insurance policy held by the investors has
become valueless, and the investors will then sue the estate of
the person for fraud and seek damages equal to what they would have
made had the policy stood up. Of course, this means the face value
of the life insurance policy is much larger than the pittance that
the wealthy person originally made by selling it.
The investors need not be much concerned about the insurable interest
problems because for them it is a "heads I win, tails you lose"
scenario. If the policy survives an insurable interest challenge,
the investors get the face value death benefit from the life insurance
company and go away fat and happy.
But if the policy doesn't survive an insurable interest challenge,
then the investors get to sue the helpless (because dead people
can't testify in their defense) estate for the fraud of the wealthy
person who sold them the now "bogus" life insurance policy, and
they can collect the face value of the life insurance policy from
the estate. From the investors' view, this is of course another
excellent advantage to dealing only with wealthy people.
The Problem with Rebating
Yet, it is not easy to get the attention of wealthy people to enter
into these transactions, and they usually don't want to take a medical
examination or having people prying into their private lives, so
the insurance agent must offer substantial bait. This bait usually
comes in the form of large amounts of cash paid up-front.
How much cash? On a $10 million policy, the wealthy person might
get as much as $500,000 up front just for taking the medical examination
and signing the application. They also get "free insurance" for
the two year period until the contestability period expires, and
the investors feel safe in buying the policy. Half-million bucks
for a couple of hours' work? Sweeeeet.
What the wealthy person isn't told is that this money is coming
from the commissions paid on the life insurance policy that is sold,
and thus amounts to what is called a "rebate" of commissions by
the agent. Such rebates are usually illegal, and we've heard that
some state insurance commissioners are starting to look into the
practice. While rebating is an illegal practice for the agent, it
isn't necessarily illegal for the wealthy person. However, if something
happens and the policy later fails, the rebating could be great
evidence of collusion between the life insurance agent and the wealthy
Who Ends Up Owning Your Life?
So where do all these life settlements end up? Most of them end
up in pools owned by large financial institutions and hedge funds.
The firms monetize the policies and sell interests in the pools
to the investors, which are usually even larger investment or pension
funds. That is what happens most of the time.
There is a concern, however, that particular life settlement contracts
could end up in the hands of seedy elements. Or as Steve Leimberg
puts it, "How well would you sleep at night knowing that your life
insurance policy is owned by Tony Soprano, and his rate of return
will depend on how quickly you die?"
Although having your life insurance ultimately purchased by a mobster
is probably a longshot, it may not be worth the anguish to later
find out that your life insurance policy that had been initially
purchased by a Cayman hedge fund has since been sold to an obscure
company in Colombia. With life settlements, there simply is no guarantee
who will end up owning the policy, and that might disturb some.
Indeed, the historical background of the insurable interest laws
goes back to what were known as the "death pools" of Victorian England.
Then, bettors would speculate on when a particular person would
die, and later started taking life insurance out on their lives
without them knowing about it or giving their permission. When later
the "accidental" death rates of such persons started to rise, the
English Parliament basically forbid SOLI by requiring that the purchaser
of a life insurance policy have a recognizable interest in the person
being insured. By waiting the two years before buying the policy,
the investors in life settlements skirt these rules but the underlying
concerns are still there.
Congress and Life Insurance
Some of the life insurance companies are concerned about life settlements.
This concern has nothing to do with lapse rates or death pools,
and everything to do with Congress. Their concern is that if Congress
realizes that life insurance policies are really just investments,
Congress will start taxing them the same way as other investments.
Life insurance has a huge tax advantage over most other investments
insofar as its value is allowed to build up tax deferred no income or capital gains taxes are due
when the life insurance policy pays off at death. This special treatment
is due to the historical use of life insurance to take care of families
after the death of the breadwinner, but today it makes little sense
where many life insurance policies are just ordinary investments
with only the thinnest sliver of death benefit being given to get
the tax-free buildup.
Congress, which is once again running huge deficits, has been eyeing
the cash buildup in life insurance policies and wondering exactly
why that buildup is not taxed. Some in the life insurance industry
are concerned that this whole life settlements business may precipitate
the taxing of this buildup.
Some Final Thoughts
So what do you do if you have already been talked into a life settlement
and then were talked into buying replacement insurance? You should
talk with an attorney to determine whether the original sale made
sense, and whether your life insurance agent fully explained to
you that it might have made more financial sense to continue to
fund the policy than to sell it. You should also talk to your attorney
about whether your life insurance agent explained to you that the
cost of insurance might be higher with a replacement policy because
you have aged. And if you are being approached to do this transaction,
you should find an attorney who is knowledgeable about it to help
you to review whether it is right for you.
Life settlements are now being pitched as "free money" for wealthy
people, but in reality they should only be used by people who no
longer have the liquidity to keep their policies in effect. For
everybody else, the sale of the policy is probably unsuitable and
the advice to sell it will often be wrong. Those considering entering
into a transaction to "grow" a life insurance policy for later sale
should consider their risks of later liability to investors if the
policy is successfully challenged, and demand indemnification and
hold harmless agreements from the investors. Also, they should carefully
consider who might end up holding their policies, and perhaps attempt
to limit the investors in their policies to strictly institutional
We expect that regulators will soon jump into the life settlements
markets, as the National Association of Insurance Commissioners
(NAIC) and various state securities regulators have started looking
into the issue. As noted, the NASD has stated that it already considers
life settlements to be a security and thus subject to suitability
analysis. Eventually, too, interests rates will rise thus making
the rates of return on life settlements less attractive to investors.
All this will cause an eventual shake-out of the life settlements
business, thus hopefully returning it to its meaningful core function
which is to provide an alternative method for seniors who cannot
afford to keep their policies up to gets some additional cash out
In the meantime, seniors should be wary of deals that offer them
quick profits for simply allowing life insurance to be placed on
their lives. They should not allow themselves to be rushed into
such arrangements, but instead should take the time to carefully
analyze what it is they are doing, and whether they would be better
off simply buying the life insurance themselves and holding it,
instead of committing themselves to selling it off after two years.
Insurance agents and financial planners should also be wary of
these deals, and the potential for later being subject to discipline
for advocating an arrangement which was unsuitable for their clients
and subjected them to lost opportunity when their client later discovers
that he would have been better off holding on to the life insurance
as his estate's own best investment. Particularly where replacement
insurance will be used, insurance agents and planners should be
very careful that they explain that the true cost of insurance for
the new policy will likely be higher than if their client had simply
continued to fund the original policy. It is not too difficult to
envision lawsuits after the death of the senior where the family
finds out that the senior had a huge amount of life insurance, but
they were not beneficiaries.
A Question of Life Settlements, by John
Skar, Senior Vice President and Chief Actuary at Massachusetts
Mutual Life Insurance Company in March/April 2004 Contingencies
Magazine http://www. contingencies.org/marapr04/commentary.pdf
Stranger-Owned Life Insurance: Killing the Goose that Lays
Golden Eggs, by Stephan R. Leimberg, CEO of Leimberg Information Services in May
2005 Insurance Tax Review, available at http://taxanalysts.com
Recognizing Life Insurance's Value: Study Says Keeping
Policy May Mean a Bigger Payoff Than Selling to an Investor,
by Rachel Emma Silverman in the Wall Street Journal, May 31,
Letting an Investor Bet on When You'll Die, by
Rachael Emma Silverman in the Wall Street Journal, May 26, 2005.
* * *
Meanwhile, other Quatloosian news . . .
Lynne Meredith has been sentenced to 10 years in prison,
following her conviction on multiple conspiracy and tax evasion
counts. Best known as the author of "How to Cook a Vulture" and
the leader of the West Coast "We the People" movement, Lynne's transition
from multi-level marketing to tax scamming by way of pure trusts
reaped her millions in profits, and earned her an exclusive property
in Seal Beach, California.
But another promoter, Joseph Banister, a California CPA
who has since been disbarred by the tax court and a former IRS-CI
agent, won acquittal on essentially the basis that he was assisting
his client in filing a "protest return" although his client was
convicted of tax evasion and is serving a six-year sentence based
on that return. Interestingly, Banister's lawyer admitted that Banister
had been paying his federal income taxes.
Meanwhile, the owner of an electronics store in Fountain Valley,
California, who vowed never to pay taxes while maintaining an expensive
50-foot yacht named "Dream Lover", will now face the nightmare of
federal prison, and possibly state prison also. Nick Jesson,
who was prominently featured in USA Today advertisement by the We
The People organization, plead guilty in federal court to filing
a false income tax return, presumably so that he could better defend
against tax evasion charges filed against him by the State of California.
Jesson was at one time a candidate for governor of California (but
who hasn't been).
* * *
Quatloos.com was cited by a U.S. District Judge in the case of
Meyer v. Commissioner, W.D.Wis. 04-C-0857-C, May 18, 2005,
as a private resource by which a tax protestor should have known
that his arguments were frivolous.
* * *
Meanwhile, one of the promoters of a nationwide mortgage elimination
scam known as Dorean has been arrested, and his partner is
a fugitive from justice. Federal authorities have arrested Scott
Heineman and Kurt Johnson of the Dorean Group, both of
whom are charged with defrauding their clients and lenders by filing
bogus court documents that purported to "eliminate" their clients
Interestingly, even after these arrests, Dorean continued to hold
his Las Vegas convention for its suckers, er, customers, and the
then-on-the-lamb Kurt Johnson addressed the crowd by way of a telephone
placed on the speaker's stand. Probably many of their customers
will also end up spending time in federal prison for loan fraud,
occasioned by their taking second mortgages on their homes without
disclosing that their first mortgages had not been discharged.
A U.S. District Judge has also entered an injunction order against
Dorean and its promoters, after learning that millions of dollars
from their customers has gone missing offshore.
A recent excellent article was published in the American Bankruptcy
Institute Journal about the tactics used by the promoters of mortgage
and credit elimination promoters, which is available at http://www.stroock.com/SiteFiles/News132.pdf
Meanwhile, the former chief of the Benistar 419(A)(f)(6) plans,
Dan Carpenter, was convicted on all 19 counts of mail and wire fraud
relating to the alleged misappropriation of over $9 million in client
funds used in exchanges.
Finally, the various Xelan entities have won substantial legal
fees against the U.S. Department of Justice following its victory
in repelling the DOJ's attempt to freeze Xelan's assets and get
a permanent injunction against their activities. The U.S. District
Judge found that the DOJ's actions were "substantially unwarranted".
The Xelan saga continues . . .