August 05, 2006 (Original publish date) • By Dennis Beaver
I was contacted by a life insurance salesman – a friend of a friend – who has a money making proposal that seems extremely interesting. Basically, I apply for a life insurance policy – a really large life insurance policy – go through a physical, and once the policy is issued, I am loaned 5% of the death benefit by a group of investors and sign over ownership of the policy as security. The investors pay the premiums and if I die, they collect the proceeds. It is called a Non-Recourse Loan, and the insurance salesman told me that it is a new and perfectly legal way making money out of life insurance while you are living. Have you have heard of this kind of a thing, or is it a scam? Thanks, Ben in Lemoore.
Meet My New Friends – The Mob
Ben sent me copies of all the documents the “friend of a friend” wanted filled out, which required him providing all his personal financial information, tax records, vehicles he owned – everything. The name of an insurance broker in the Marina Del Rey area of Southern California appeared on these forms, and I phoned the broker, who I will just call “David” and spoke with an ever-so-helpful assistant.
“Hi, my name is Dennis and I heard that you have a really super insurance program that I can get into and actually be paid for obtaining a large life insurance policy. My understanding is that I don’t ever have to make a payment, because when the policy is issued, I sign it over to someone else. Is that right?” I asked.
“That’s correct,” the sexy voice replied, “and for people who have or state that they have high net worth, we usually do this two or three times, over a two year or more period of time, and with what we pay – 5% of the life insurance death benefit – our clients can go out and buy a really nice sized, fully paid life insurance policy if they want to, or just spend the money. It is called a Non-Recourse Loan, as we are basically loaning you money that is secured by the life insurance policy and never ask you to repay it. It is perfectly legal,” she was quick to point out.
But was it? Or was this a scam? It sounded like a “something for nothing” sales pitch, and all sorts of warning bells went off. First on my list of, “No, I don’t think so,” was the obvious effort to get around state insurable interest laws.
Insurable Interest Requirement
The chances are pretty good that unless you work in the area of insurance, tax or law, you’ve never heard of the term Insurable Interest. It simply means that before you can insure something – a car, house, boat or a life – you must have an ownership interest in that property or connection to that person, such as husband, wife, child, employer/key employee.
Insurance is based on the idea of injury or loss of some type – unless you can personally suffer a financial loss then you have nothing to insure. If you house is damaged by fire, you have suffered a loss – it’s going to cost something to repair it, or if you sell it in its damaged condition, it will be at a loss – but if your neighbor’s house burns to the ground, you have lost nothing and could not buy an insurance policy on his home. The same thing is true for your neighbor’s life.
I or my immediate family members can of course buy life insurance on my life, as I obviously have an interest in living and supporting my family, and they have a financial interest in my living and need for my support.
Hanford, California Attorney John Ohnstad puts it this way: “In a family setting, there is obviously an insurable interest, as life insurance is meant to partly replace what the family might lose if a breadwinner dies. One of the reasons a young family starting out can buy a very large life insurance policy is because it is impossible to put a dollar value on the continued life of that family member.”
Attorney Ohnstad told me that the Insurable Interest requirement, “has a past that would make for an exciting TV documentary. It goes way back to 18th century England. At that time, there were groups of investors who bought life insurance on well known people, especially those with serious health problems or whose lifestyle flirted with early death. At times, these investors would target certain individuals – who knew nothing at all of the insurance policy on their lives – with parties, booze, you name it, anything to speed up the process of cashing in that policy. It was a gruesome form of gambling on the lives of total strangers, and in 1774 the English Parliament passed laws to stop this practice, and similar laws were adopted against these ‘wagering policies’ in the United States.”
What’s Wrong With This Picture?
There are a number of potentially dangerous aspects to the scheme my reader has described.
“What you have here appears to be a scheme for investors to obtain wagering policies on people’s lives in whom they have no insurable interest. I doubt that they are disclosing the details to the insurance companies underwriting the risk. They are gambling against the insurance company, which wants you to live a long time, paying premiums, while it delays or avoids paying a death benefit. Taking out the policy and immediately assigning it to a third party for a quick payoff could be seen as participating in fraud. So what if they pay you $50,000, do you want to run the risk of criminal prosecution or even a civil suit by an insurance company if and when they discover that the whole scheme was to let a total stranger insure your life, rather than a bona fide insurance policy purchase? And just who are these investors anyway? Do they really want you to live to a ripe old age, or would they instead profit by your early departure?” Mr. Ohnstad asks.
“And let’s not forget the case of the two elderly women in Los Angeles who were arrested and charged with murder in the deaths of several homeless men whom they befriended – and on whom they took out life insurance policies as beneficiaries. This illustrates the risks of someone owning an insurance policy on your life who does not have a strong incentive to keep you around, he added.
So, if approached with this kind of a scheme, what should you do?
“Don’t do it. Simple as that. Understand that life insurance is not to be used for profit, but is a risk spreading tool for the benefit of society. If you are so approached, run the other way,” John Ohnstad recommends. I agree.
Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.