The Life Insurance Lawyer

It’s not often that the life insurance industry is prominent in the news, but it was on June 11, 2013 when the New York Times reported how New York State regulators are calling for an end to tricky financial transactions used by life insurers to inflate their assets by billions of dollars.

By making secret and dubious transactions that make them look richer than they are in reality, insurers are putting life insurance policies at risk because there may not be sufficient reserves to cover them.

Think of how in the run-up to the 2008 financial crisis the banks were engaged in fraudulent practices that ultimately boiled over and almost wrecked the entire financial system. Well, it’s pretty much the same concept that’s at work here–companies making bigger and larger bets without sufficient capital to pay them off when they go bad.

We don’t know if it will happen with the life insurance industry, but it appears that insurers’ widespread practices, especially among publicly-traded companies who are under more pressure to increase profits, raise the risk of danger.

According to New York Superintendent of Financial Services, Ben Lawsky, it took his team of investigators nearly a year to follow the paper trail left by insurers. He said that New York-based life insurers inflated their books to the tune of $48 billion.

One technique used is for insurers to create shell companies and then utilize them as reinsurance vehicles for risk accumulated by the insurer. Reinsurance involves spreading insurance risks to other entities. But that does not occur when reinsurance is done through a shell company created by the same insurer, as opposed to a reinsurance transaction through an independent entity that is responsible for the risk and performing its own underwriting. The risk remains with the insurer. When the appearance is that valid reinsurance arrangements are in place, however, that is a problem.

Read the article for more details. You’ll see what I’m talking about in more detail. Be forewarned, however, that reading about financial transactions made by insurance companies is not exactly the most exciting reading out there. It ain’t John Grisham or David Baldacci. Beforehand, you may want to have a strong cup of coffee.

An overarching problem with the insurance industry is that it is regulated by the 50 states and not the federal government. Consequently, insurers can flock to states with the most favorable laws (and New York is a pro-insurance state) and also more easily evade regulation because, naturally, the regulators are more diffuse, than if there was a single, centralized agency performing monitoring and oversight.

We’ll see what happens. Hopefully, it won’t be 2008 redux.

A brief article posted on abcactionnews.com highlights a problem that I see quite regularly as a life insurance attorney who represents policyholders and beneficiaries — the phenomenon of universal life insurance policies that prematurely run out of cash value and lapse.

People invest thousands of dollars in these policies, believing they will serve as both an investment vehicle with the accumulation of a cash value, and provide protection for their loved ones after they die.

Then all that money goes right down the drain, or, more accurately, into the accounts of the life insurance company. And, you guessed it, life insurance companies don’t mind this one bit. In fact, I have had life insurance company attorneys explain to me that their clients expect to, and depend on, generating revenue from policyholders who make substantial premium payments and then, for one reason or another, whether it is a late payment, illness, or lack of affordability, have their policies lapse without any value.

This occurs in the context of universal life policies because, unlike term and whole life policies, universal life policies’ performance fluctuates based on insurance rates and the cost of insurance, two variables that can change over the course of the policy’s life. This means that policyholders who purchased universal policies back when interest rates were high have suffered over recent years.

The policy’s fine print may (or may not) warn of this course of events, but the disclosure, even if made, is seldom actually read and understood by consumers, and is also usually not a complete disclosure — that is, it does not fully and adequately inform the consumer in plain English of what exactly might happen in the future.

Frequently, I interview prospective clients who are shocked and dumbfounded that their policy has lapsed, or is about to lapse. What they were told by their agent or broker when purchasing the policy was quite different than what actually transpired.

Those considering purchasing universal life policies should ask questions to their agent or broker to determine if it is the right policy for them. Two questions that immediately come to mind are: (1) Why is a universal life policy a better option for me than a term or whole life policy? and (2) What is the worst performance that this policy could have in the future, in which case, what payments would be required to keep it in force until the end of my life?

I’m always on the lookout for good book recommendations. If you haven’t already, I suggest you pick up a copy of Justice by Professor Michael Sandel of Harvard University. He’s a renowned political philosopher with a communitarian bent, and the book emerged from his extremely popular undergraduate course at Harvard of the same name.

Justice provides an accessible overview of the theories of social and political philosophers such as Aristotle and Kant whom you may have studied in your undergraduate days, but if you’re like me, only hazily recall, applying them to current phenomena ranging from wealth inequality to affirmative action to abortion.

A recent article in The Daily Princetonian reports on a talk that Professor Sandel gave at Princeton University that touched upon — you guessed it — the subject of life insurance, focusing on it in the wider context of how some financial investment and activity can have the effect of devaluing the importance of human life.

He gives examples of how some life insurance arrangements amount to wagering on life. For instance, Walmart took out a $300,000 life insurance policy on a janitor it employed, without his knowledge, and the result was that the janitor was worth more dead than alive to the company. Of note, these arrangements, Professor Sandel pointed out, do not exactly promote workplace safety. Are they moral? Should companies make money off line employees when they die? How about when their families may receive nothing?

Another example is that in recent years, it has been common for investors to purchase life insurance policies from individuals who have a high mortality risk for immediate cash payments. (I have blogged about the life-settlement industry in previous posts). Professor Sandel notes how these arrangements directly link profit with death. If the insured dies, the investor makes a handsome profit. Of course, investors argue that these are not coerced transactions and they are providing a financial benefit to a person in her final days. Even assuming that is true, and it is a point that can be challenged because the transactions often occur when the insured is in a desperate state and may be without funds to pay for health care, the question arises about whether they are good for society? What moral values do they promote?

While life insurance certainly plays an important role in society of protecting the welfare of individuals and families when a loved one dies, there is a darker aspect to it that has come to fruition. As Sandel suggests, we should think about how these arrangements impact our social fabric. ““Would you want to make a living betting that people will die sooner rather than later?” he asked the audience.

The Washington Post reports that three life insurance companies issued policies for total amount of over $500,000 on the life of a 15-month-old who was allegedly drowned by his father. One policy issued by Mass Mutual was reportedly for $443,000.

The police have asserted that father obtained the policies as part of a horrific scheme to collect money.

From an insurance standpoint, it is shocking that there would be this high amount of coverage for a toddler. Children do not need life insurance, generally, unless they are child movie stars or there is some other unusual situation where there would be a financial fall out in the event of the child’s death.

This unfortunate incident will hopefully serve as a reminder to insurance companies to implement better underwriting practices when evaluating applications and issuing policies. Unless there is other undisclosed information, it would seem that Mass Mutual should not have issued such a large policy in this instance.

The irony is that when insureds die within the two-year contestability period, insurance companies scour the initial application with a fine-tooth comb in order to uncover material misrepresentations, in order to disclaim coverage. Though the criminal case against the father has not yet been decided, this sad incident reinforces that insurers should do a better job evaluating applications prior to issuing policies. In this case, doing so might have been the difference between life and death.