Life Settlements, Viaticals and "Dead Peasant" Policies Enable the Rich to Profit From Death

Always on the lookout for some juicy news tidbits regarding the Big Bailout, my eyes alighted upon a Wall Street Journal article entitled, "AIG Loses Life-Settlement Dispute". Apparently AIG, one of the recipients of taxpayer largesse back in 2008, has been buying up elderly people's life insurance policies for fun and profit. Some they keep, others they sell to investors. Additionally, just as they created "credit default swaps" in order to insure junk CDOs before the banking crisis burst on the scene, they also sell insurance policies for these life settlement instruments. The suit revolved around AIG trying to renege on these payouts--to which the arbitrators said, "Pay up".

Back in the 1980s, I remember reading about some particularly ghoulish investors who came up with the idea of buying up the life insurance policies of terminal AIDS patients (a quick Google search reminded me that these instruments were called viaticals). These "helpful" investors touted this scheme as a way for financially tapped-out AIDS victims to get access to some quick cash in their last days. Putting aside the fact that dying individuals are seldom in a position to engage in an arms-length sale of any kind, this type of transaction also denies the policyholder's family of the insurance proceeds necessary to bury their loved one and refill their own depleted financial coffers. It was all perfectly legal, however, and many investors got rich off of the truncated life spans of AIDS patients.

Skip ahead to the 1990s when, at least in the U.S., a diagnosis of HIV or AIDS was no longer a death sentence.  Enterprising investors now set their sights on the elderly with projected life spans of two to 10 years.  Of course, elderly life insurance policy owners were not necessarily aware of this scheme, so helpful investors held workshops to educate them about this great new way to get money for their policies.  Many of these educational lectures used high-pressure sales tactics, and charges of coercion were not uncommon.

Life settlement investors purchase life insurance policies for more than the cash-surrender value but less than the payout amount. They agree to pay the premiums until the former policyholder dies, whereupon the investor receives the death benefits. This transaction supposedly is good for both parties, giving the elderly person a lump-sum infusion of cash greater than what they would receive from cashing in their policy with their insurance company, while the investor reaps the harvest when the former policyholder dies (the sooner, the better). Life settlement brokers tout their services to those who no longer want or need their policy, but the transaction can have downsides for the person selling their policy, who often don't realize the tax implications of the sale. The investors, meanwhile, have no tax liability at payout, since insurance proceeds are not taxable. And make no mistake--these guys aren't interested in buying the policies of regular Joes and Janes. They target wealthy seniors with insurance policy payouts of $100,000 or more.

The life settlement industry is growing exponentially, particularly since the financial debacle of 2008 when many seniors saw their investment income and portfolio values drop, along with their home values. The WSJ estimates that approximately $45 billion worth of these instruments have been created within the last 10 years.

In his 2009 documentary, "Capitalism: A Love Story," filmmaker Michael Moore profiles two families who, after the death of a family member who had worked at Walmart, learned that the company had taken out life insurance policies on their loved ones that resulted in hefty insurance payoffs for the company. Not only did the families not know Walmart had done this, the employees themselves were similarly in the dark.  This scenario is nothing new.  Large employers have been reaping the rewards of employees' deaths for years by taking out insurance policies on their lives--called "corporate owned policies"--without the employees knowledge or consent. How many companies have done this?  This list implies that almost every large corporation has indulged in this practice at one time or another.  Because of lawsuits filed by family members impacted by this practice, employers are now prohibited from taking out policies on the lowest-paid persons in their employ and must have the consent of higher-paid employees before purchasing such policies.

Although litigation has provided some restrictions on the corporate-owned life insurance strategy, I can't imagine why an employee would acquiesce to his or her employer taking out a high-value life insurance policy on his life, with the company as the beneficiary. Surely, there must be some coercion going on there. Also, there is the question of parity. For instance, would I be allowed to take out a life insurance policy on my neighbor's life, with me as the beneficiary? I haven't looked into this, but I seriously doubt it. Even discounting the "ick" factor, I would be in a position of having an untoward interest in his quick demise, since every premium payment I would make would lessen the profit realized when he died, as the amount is fixed at the outset. I would be scared to death that, in the event of his death under anything resembling suspicious circumstances, I would be the first to receive a visit from the local constabulary. I doubt, however, that I would be able to do this. Why then, is it allowed for corporations? Are they somehow considered above reproach, even with this new vested interest? If so, what does this say about our so-called democracy, where man-made entities are considered somehow superior to the average citizen?

Life settlements (just a fancy term for "death", in my opinion) carry their own set of thorny ethical issues. Usually, a life insurance policy is taken out by the policyholder in order to provide some security for his or her family upon the policyholder's death. The application process usually requires a doctor's exam, access to medical records, and so on. The premiums are set by considering these health issues plus age, life expectancy, etc. These policies are usually taken out when people are young and just starting a family, so premiums are low. If investors were to take out policies on these elderly individuals themselves, the premiums would likely be astronomical. So, they just purchase the policies from the policyholders themselves. Is this not insurance fraud? Apparently not, although this does not seem to be the purpose for which these policies were intended. Then there is the tax-dodging question. While both corporations and individuals are required to pay capital gains on investment income, insurance proceeds are tax-free. These guys probably get to deduct the purchase price and premium payments, too.

The worst part is that since the bailout, the U.S. government holds a high stake in AIG, around 90%. This means, whether we like it or not, we are all complicit in these actions. That really leaves a bad taste in my mouth!

You've got to hand it to these guys, though. They sure seem to have the "death and taxes" thing sorted out.