Life Settlements Consumer Awareness
Fraudulent activities within the life insurance industry exist when consumers are not made aware of particular situations. It is extremely important that policyowners, insureds, and advisors are informed in order to avoid mistakes that may lead to unlawful practices. Helpful information is below. As part of our ongoing anti-fraud efforts in the State of New York, as a proud member of the Life Insurance Settlements Association (LISA), we participate in their Consumer Awareness program.
Policy Requirements
There are multiple requirements that need to be present in a life insurance policy in order for it to be considered eligible for a Life Settlement transaction. These include, but are not limited to:
Contestable Period
Life insurance policies have a non-contestability clause. This provision is designed to stop life insurance companies from refusing to pay out a claim to individuals after the contestable period is over. Under the non-contestability clause in a life insurance policy, the life insurance company is given a one-time period in which it can contest the validity of the information on the life insurance application.
Non-contestability periods for life insurance are typically two years (although they vary by state) After this period ends, the insurer is legally obligated to pay the death benefit and has lost the right to contest the policy.
Magna’s guidelines strictly forbid transactions where policies that are within the contestability period are involved.
Insurable Interest
Insurance intended to compensate an individual or business for a financial loss and not to provide an opportunity for gain. Insurable interest must be present in order for an individual to enter a new life insurance contract.
Insurable interest exists when a person or entity derives a financial or other kind of benefit from the continuous existence of the insured. A person has an insurable interest in someone when loss-of or damage-to that person would cause the beneficiary to suffer a financial loss or other kind of hardships.
During its underwriting process, Magna performs due diligence procedures to verify that insurable interest was present at the time a policy was issued.
Insurable Capacity
Each individual who applies for life insurance has a maximum threshold of coverage that will be issued based on their financial capacity, and the industry capacity for an individual risk. An insured’s financial capacity pertains to the ability to purchase a maximum amount of in-force policies as representative of that insured’s net worth.
Magna performs due diligence procedures to verify that the insured had the insurable capacity to contract the amount of insurance coverage purchased at the time a policy was issued.
Intent to Sell
Compliance to state regulation requires that the purchase of a life insurance policy is done with Insurable Interest. Although knowledge of the Life Settlement industry is accepted, the intent to sell a life insurance policy before the purchase of that policy is not prohibited. Consumers taking out policies with the sole intent to sell could find themselves with unwanted policies and a lack of investor interest in their policy. This distinction can be confusing for consumers who might not understand their ownership position. Life Settlements are an option for those consumers who entered into the purchase of a life insurance policy for legitimate reasons.
Fraudulent Practices
Some of the most common and sometimes prohibited practices include:
Clean Sheeting
“Clean-sheeting” is the practice whereby an individual, alone or in conjunction with a third party, commits fraud in the life insurance policy application process. The fraud may be making untrue, false, deceptive or misleading statements in order to obtain a life insurance policy, such as an AIDS patient (stating “NO, I never have had AIDS, or been told I have HIV infection”) or to obtain lower policy premiums (as when a 5′ 2″ 300 pound smoker says “I do not smoke, and I am 6′ 2″ and weigh 180 pounds”), or omitting to state a material fact (“The reason for my low weight is loss of both legs to diabetes”) to having an imposter take the medical exam for the insured.
Wet Ink Policies
Insurance carriers institute a period of time in which a policy can be rescinded or cancelled due to fraud and is known as a contestable period. Policies that are sold during this contestable period are described as wet ink because of the recent purchase of the policy.
Stranger Originated Life Insurance (STOLI)
With stranger originated life insurance or STOLI arrangements or stranger initiated life insurance a third-party investor or hedge fund with no relationship to an individual initiate the purchase of policies by paying the premiums and later buying the policies, thereby profiting upon the death of the insured. These arrangements violate the insurable interest law, which is designed to ensure that a person buying a life insurance policy has an economic interest in the continued life – not death – of the insured.
Stealth Financing
Stealth Financing, as it names describes, is the practice by which a person enters a life insurance agreement and borrows funds in order to make premium payments while stating in his or her contract with the life insurance company that he or she had no intention of borrowing funds for those purposes.
Medical Fraud
These situations occur when fraudulent claims and material misrepresentation with regards to the medical information are made in the original application for life insurance. A misrepresentation of the truth and answer “no” to all of the medical questions and there is a pre-existing medical condition not declared. An identity misrepresentation can also be a form of medical fraud.
A second form of medical fraud arises when there is misrepresentation or inaccurate medical diagnoses provided by a physician or an examining paramedic.
Magna’s medical fraud prevention program consists of a thorough evaluation of the insured’s medical records and policy documents. Magna’s expertise in life insurance underwriting plays an important role in this process.
Intent to Sell
Compliance with state regulation requires that the purchase of a life insurance policy is done in accordance with Insurable Interest regulations. Although knowledge of the life settlement industry is accepted, the intent to sell a life insurance policy before that policy is purchased is not prohibited. This distinction can be confusing for consumers who may not understand their ownership position. Life settlements are a suitable option for those consumers who entered into the purchase of a life insurance policy and have a legitimate need to sell the policy.
