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.

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Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.

The post Here’s what you don’t know about your retirement account and life insurance appeared first on Dennis Beaver.

Today’s story is a modern day version of David and Goliath where Prudential Financial, the second largest American life insurer, is Goliath.

This behemoth of a company is no stranger to jerking around policyholders and was involved in a billion dollar class action lawsuit in 2000. Prudential radiates a corporate arrogance which we discovered while trying to help Hanford Sentinel reader “Mike” obtain payment on a life insurance policy on his wife, “Susie” who, after a lengthy illness, died in July of 2011.

“You Divorced Before Her Death”

It was a “Dependent Life Insurance Policy” obtained while Mike was employed by Lockheed-Martin and premiums were paid over 20 years. While the couple divorced in May of that year, in a recorded phone conversation with a representative of the Lockheed-Martin Employee Service Center, Mike was told that the life insurance policy on Susie could remain in effect if he wanted. He did, and continued to make premium payments.

In general, this type of life insurance requires a couple to be married, but there are many reasons why coverage can still remain in effect, for example, court ordered child support, or other financial issues, which was Mike’s situation. He explained to us that his wife’s medical problems led to tremendous debt issues. He did not wish her death, but sadly, maintaining the policy was the only way he could recover financially.

Of course, none of this mattered to Prudential, who refused to pay the death benefit. We were met with a “Go pound sand!” attitude by them as well. No, they weren’t paying this claim, not now, not ever. Mike needed to retain a lawyer promptly, as the clock was ticking on Prudential’s appeal process. He needed a “David.”

For the next two years, attorneys Ron Jones and David Kahn of the Kahn, Soares and Conway law firm in Hanford would prove to be more than a match for Goliath.

“Stonewalled and Lied To – But We Did Not Give Up”

“Insurance companies expect most people in Mike’s situation to just go away,” commented Jones, “But if you are right, don’t give up! You have a right to appeal, which is exactly what we did, asking Prudential to revisit the claim and to consider that Mike had been advised he could maintain the life insurance policy on his wife.

“Copies of all documents, notes, transcripts of recorded phone conversations, internal communications – anything which supports your position must be asked for. But be aware that unjustified delays and playing hide-the-ball is often standard operating procedure. That was precisely what we saw take place–over many months–including outright denials that they had certain information which we later discovered. We were stonewalled and lied to but did not give up.

“Prudential claimed that Mike was informed on May 13th, 2011 that his divorce terminated the life insurance policy on Susie, but they never could produce a recording of that phone conversation. Internal communications painted Mike as someone who was trying to take advantage of a mistake made by one of their representatives in not removing the dependent life insurance at that time,” Kahn pointed out.

“It was obvious they never considered the possibility that he was telling them the truth, and then, you have to imagine the look on their faces when, on September 24th 2012 this e-mail comes in: ‘We were finally able to locate the 5/31/11 call, informing him that he could keep the life insurance. So, what should Prudential do now?”

“Obviously, basic ethics–simple right and wrong–would give a decision maker only one choice, and a check should have been written immediately. But that’s not what Prudential did. Instead, they kept quiet about that stunning piece of evidence, and in a batch of documents sent to us, there was that e-mail! It was the smoking gun, proof that Mike had been truthful,” Kahn stressed.

“We immediately brought it to their attention. And the response? ‘Sorry, you’ve provided us the evidence too late. Case closed.’

“At that point, following Beaver’s recommendation, we brought this to the attention of the California Department of Insurance,” Jones stated.

Help From the Department of Insurance

You and the Law had been kept in the loop, and we, too, were amazed, that, despite proof

that Prudential knew in September of 2012 that claim should be paid, still they refused.

It was time for us to contact the Press Relations office at the Insurance Department: “My reader needs your help, here is your file number, please look into this.”

Now, we can’t reveal what they and Prudential talked about, but a week later Jones and Kahn phoned our office.

“We just got off the phone with Mike. He is holding a check in the amount of $119,000.”

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.

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Once upon a time in a small Northern California town that reminds you of “Back to the Future,” lived two high school sweethearts, Ali and Mike. After graduation they married, promptly had two children, now grown and starting families of their own.

54 percent of “high school sweetheart” marriages fail within 10 years. But they just celebrated, “26 years of happy married life, in fact, we have known Mike since he was a young boy, and all of us have a great relationship,” Ali’s father wrote.

“She has always supported Mike’s desire to advance in his career. With overtime, he earns over $130,000 a year. Ali runs her own part-time book-keeping business, and makes around $25,000,” her father explained.

“Had a great relationship” would have been a better choice of words, as “Last Monday, Mike informed Ali that he no longer wants to be married, claiming that there is no one else and that she’s not the problem.”

“For the past two years he has been distant,” Ali explained, and when asked what reason Mike gave for not wanting to be married, stated, “He says that he wants to come and go as he pleases without being tied down. But he always did — dirt bike riding with friends, we camped, hiked, he worked in his garage — he always had complete freedom and we even bought a camper.”

After close to 30 years of married life — in a good marriage — loving husbands don’t want more freedom, unless it is freedom from this wife.

“He was unfaithful before, right?”

“Yes, long ago, right after we were married, but how could you possibly know that?

“By spending 25 years in divorce court.”

This couple are still living in the same house which is not a healthy situation, emotionally, physically and from a financial perspective. If Mike has any bully tendencies, Ali is at risk. He needs to leave the home immediately.

Living under the same roof with Mr. I Betrayed You — despite his denial — is an invitation to more than an ulcer, especially when, “Yesterday, he did something very strange. Normally, I buy his underwear, on sale, but he went out and purchased designer underwear and cologne, and he never wears cologne!”

I rest my case as to Mike’s concept of marital fidelity, yet that is the least of Ali’s concerns.

She now must protect herself financially, especially when Mike announced, “Sure, I will help you get on your feet with a few hundred dollars each month for a little while.”

Clearly, Mr. Faithful didn’t do his homework.

Probably not having a clue at just how expensive divorce is when you are in a long-term marriage, Mike’s new girlfriend is not going to be a happy camper when she realizes that spousal support (alimony) payments will likely be from $28,000 to $35,000 a year. That means sweetie pie will have much less of Mike’s money to spend than she figured.

Husbands earning Mike’s level of income do not have the luxury of saying Adios to wife without “Maintaining the standard of living established during the marriage,” as Family Code Section 4320 sets out. The longer the marriage, the longer support will typically be ordered.

Lawyers are often asked by panicky clients leaving a long marriage if they could be ordered to pay lifetime support. Unless the parties agree otherwise, courts generally retain jurisdiction over support with marriages over ten years duration.

As it seems unlikely Ali will ever have an earning capacity remotely close to that of Mike, he should expect automatic deductions from his paychecks for a long time to come. When Mike awakens from his “I Want to be Free” fog, Ali is going to face great pressure to reduce the time of alimony payments. If she agrees, that would be a monumental mistake.

Ali needs to immediately photocopy all their financial information, including home, bank accounts, automobiles, insurance — everything. It should be safely stored away from the family residence, even if Mike moves out. She also needs to change the locks.

Especially important are life insurance and retirement documents, verifying that she is listed as the beneficiary.

Finally, Ali must retain her own lawyer, making no decisions and taking no actions with Mike unless she runs it first by counsel.

Studying a menu is one thing. Placing an extra-large order of Forbidden Fruit is something far different. The touch, the scent, the feeling, so enticing, new, different, just delicious. Yet some contain pits, precisely what husband Mike will soon feel, the pits.

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.

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Today’s question should be of special interest to all families in agriculture, where some of the adult children might already have other occupations, perhaps live far away and do not want to — or are unable — to actively be involved in day-to-day operations.

What happens to the farm when Mom and Dad die? How do you keep the business running and at the same time let the children share in its value, obtaining their percentage of the estate?

When not asked, it is a question which has been the direct cause of enormous financial and relationship loss in many farming families.

For an answer, we turned to Linda Monje of Bakersfield, a lawyer/CPA who has worked with ag families for many years.

In agriculture, money to pay heirs often in short supply

“In agriculture, cash is usually in very short supply,” Monje began. “It is rare for a family farm to have enough cash on hand to immediately pay all family members their present value and at the same time to continue to operate profitably. So, unless the farm is sold, the challenge is how to keep it operating — and pay something appropriate and fair to siblings who will not be active in the business.

“Clearly, an agricultural business has greater value when it is being operated and less when you sell off equipment and land. A working farm creates a livelihood for those running it, provides employment and injects money back into the community,” she adds.

“But when a son or daughter are designated to take over, and have to pay other family members their share, unless carefully planned, you could see destruction of both business and family harmony,” she stressed.

“If Bob and his wife will be operating the farm, and expect to earn a living for years to come, do you account for their income, and add it to the amount of money the farm is worth, and then require further payments to the other children? Or do you realize they accepted the risks of running a business, and therefore should get all of the rewards, if there are any?

“Do we put Bob in a position of working hard to keep the family farm successful, and then years later, force him to buy it back from his brothers and sisters who have contributed nothing? Jealousy and misunderstanding will result if these issues are not addressed.

“The most trying times for farming families can be the realities of a complicated inheritance.

“Parents need to address these issues while they are mentally sharp and able to involve their children in these important decisions,” she strongly recommends.

Two approaches for resolution

“The easiest approach with a farm that has several parcels of land is to simply give some to the children who will not stay on the farm.

“The remaining land belongs to those siblings who will continue the farming business. This requires adequate amounts of land to accommodate such a division and is an excellent solution when the children all recognize that brothers Bob and Rick have always helped dad run the farm and want to follow in his footsteps.

“A commonly used alternative is a life insurance policy on a parent, such as:

1) A whole life policy of insurance on, we will say, mother, is purchased by the family members who plan to run the farm.

2) The beneficiaries of the policy are those children who are not actively involved in business operations.

3) Often, there will also be a cash-equalizing payment of some amount.

4) The children who are running the farm must keep the policy paid current. It is always a good idea to be sure that a parent — who is mentally sound — is involved in at least being aware of payments being made.

“The benefits of this kind of an estate resolution can be significant, eliminating family discontent, and when mom dies, frequently paying out far more money tax free to the non-operating family members than if they had taken their percentage at the time dad died.”

Need cash now? Policy loans    are possible, but …

“What this means is that the non-farming children own the policy and will receive payment when mom dies.

“It also means they have the ability of taking a loan against the policy, or cashing the entire policy in, or part of it,” notes Monje, while asking an important question:

“But what happens if they do? Will previously hidden, jealousy-steeped issues surface?”

They did for Hanford readers. Their story, next time.

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.

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