Selling a partially paid life insurance policy for immediate cash was once limited to the terminally ill, and the transaction was between the policyholder and the insurer.
The buying and selling of policies, which started with AIDS patients in the 1980s, grew into a business of its own, mostly behind the scenes and, at the time of writing, largely unregulated. Healthy people began cashing in their policies, taking a smaller payout now instead of a far larger death benefit later for their beneficiaries.
From viatical to senior settlements
“This business has enormous potential,” said Paul Permison, whose partnership, The Ardan Group of Woodbridge, NJ, solicits investors to buy other people’s life insurance.
These investments, known as senior settlements, sit on the fringe of the financial industry. When this article was written they were completely unregulated in many states, a situation that troubled some financial planners. Not The Ardan Group. “This is just another option to help people,” said Permison, whose company also sells caskets from a Woodbridge showroom.
How a senior settlement works
Permison and his partner, John Mandel, find people who are paying expensive insurance premiums and convince them to sell their policies for cash. Permison’s investors, promised a share of a windfall when the policyholder dies, take over the premiums. The Ardan Group takes a share of the profits from the settlements.
The investors who finance these settlements eventually divide the policy benefits among themselves. The sooner the insured person dies, the greater the return. The longer the policyholder lives, the smaller it gets.
Three real policy sales
Permison arranged the sale of a $5 million universal life policy owned by an 80-year-old man who had paid $120,000 in premiums. “He’s exceedingly happy,” Permison said.
Financial consultant Bill Senno arranged the sale of a $500,000 policy for a 72-year-old chemical company executive who had suffered a heart attack 15 years earlier. His premiums were low, about $9,000 a year. In another case, a 67-year-old leukemia patient with $10 million in life insurance sold one $3 million policy to Senno and his investors and kept his remaining $7 million in coverage.
| Insured | Policy sold | Life expectancy | Paid to seller |
|---|---|---|---|
| 80-year-old man ($120,000 in premiums paid) | $5 million universal life | 7 years | $175,000 (3.5% of face) |
| 72-year-old executive, earlier heart attack (about $9,000 a year in premiums) | $500,000 | 8 years | $210,000 |
| 67-year-old leukemia patient | $3 million (of $10 million total coverage) | 6 years | $1,237,500 |
“These are annually renewable policies,” Senno said. “These people are facing premiums that ratchet up every year. If they quit tomorrow, they alleviate the burden of paying premiums, but get nothing in return. In this situation, I became a hero.”
Why financial planners got involved
A growing number of financial planners began approaching policyholders who wanted out of hefty annual premiums, or who wanted to collect now rather than later. Some people nearing retirement decide they’re “overinsured,” the planners say. Their children may be out of college and well off, while a million-dollar policy may cost $50,000 a year to keep.
“For some people, [senior settlements] are a valuable financial tool,” Senno said.
Finding brokers like Permison and Senno, who both make a market in other people’s life insurance, is much easier than finding people willing to say they sell or invest in policies. “Nobody wants to talk about it,” Permison said. “These are usually high net-worth individuals who wish to remain anonymous.” Neither would name clients.
An open door for fraud?
Hero or not, state regulators were skeptical of senior settlements and saw them as an open door for fraud. Some advisers wanted nothing to do with them. “I don’t get involved with that,” said financial adviser Gary Presslaff. “I would not touch this one,” said Jacob Solomon. “My vendors are not in the business of negotiating arrangements like that.”
Selling the value of a policy before death isn’t new. Prudential Insurance Company of America had offered its Living Needs Benefit program for sick or dying policyholders for about 17 years at the time of writing. “We’re pioneers in this,” said Prudential spokesman Bob DeFillippo. “There are times when it’s the only thing available to people.” But Prudential doesn’t buy back the policies of healthy people, and most insurance underwriters frown on other companies urging policyholders to cash out before death.
A federal judge opened the door for companies to buy the policies of the terminally ill, no matter where the companies are licensed. Regulation, at the time of writing, did not exist in most states.
“This is a new, unregulated investment and there are no rules,” said consumer advocate Gloria Wolk, author of Cash for the Final Days, a book on the pitfalls of viatical settlements for buyers and sellers. “Yet there are people out there being told that these investments are safer than certificates of deposit and offer a higher yield. Few investors really understand the risk.”
Even Permison agreed: “Ultimately, all states should seriously look at regulating this business. There’s no question more people are entering it.”
