How to Control Your Heirs From the Grave

August 10, 2012
How to Control Your Heirs From the Grave
By: LAURA SAUNDERS
Can you force a grandchild to take a drug test in order to receive an inheritance? Insist your heirs use trust
funds only for tuition at your alma mater? Make sure your wife's future husbands can't run through money
you worked hard to earn?
In many cases, the answer is yes—you can, in effect, control your heirs from the grave.
The issue of what you can give away and how is especially relevant now because unusually favorable estateand gift-tax rules are set to expire. The "exemption" for both—which is the amount of assets a taxpayer can
transfer to others, tax-free, either at death or through gifts while alive—is now $5.12 million per individual,
and twice that for a couple. The top tax rate on amounts above that is 35%.
But not for long. In January the exemption is slated to drop to $1 million per person, and the top tax rate will
jump to 55%. Although many experts don't think those changes will stick because they are so unfavorable, a
new regime might well be less generous. President Barack Obama favors a $3.5 million exemption and a 45%
top rate.
With the law in flux, experts are recommending that wealthier taxpayers who can afford to part with assets
make gifts of them this year. The rationale: if the law becomes less favorable, this year's gifts either will be
grandfathered in or, at worst, won't be "clawed back" until death.
Clients are listening. "For this year I'll be filing three times as many gift-tax returns as I have in the past," says
Lauren Wolven, a tax expert at law firm Horwood, Marcus & Berk in Chicago.
"It's as if a cork popped out of a bottle," adds Joe McDonald, an attorney at McDonald & Kanyuk in Concord,
N.H.
As with many good tax deals, there is a hitch: Taxpayers taking advantage of the exemption by making gifts
have to give up control of assets today. Typically that means putting them into "irrevocable trusts" that
require upfront decisions about who will get what, when and for how many years thereafter.
So what does the law permit? Surprises, at times. Leona Helmsley, the widow of billionaire real-estate
magnate Harry Helmsley, left a trust to care for her beloved dog, Trouble, after her death. Ms. Helmsley also
required her grandchildren to visit their father's grave once a year in order to receive payouts.
For people scrambling to set up trusts before year-end, here are some important considerations. And for
those who don't have millions to give, the good news is that most of the same rules governing trusts apply to
ordinary wills as well.
Give as You Wish—Sort Of
In general the law is biased toward allowing people to leave assets as they wish—even if the wish seems silly.
Nearly 100 years ago, a Connecticut court upheld a requirement that heirs had to spell the family name in a
certain way to receive a payout. (It was Tyrrel.)
But there are limits. One is for provisions "contrary to public policy." This category has always included
requirements that promote divorce or criminal behavior; now it extends to racial discrimination. For example,
courts have struck down provisions leaving money for scholarships for white girls.
Discouraging marriage also is frowned on. A court would almost certainly invalidate a provision requiring a
daughter to remain unmarried in order to receive her trust payout. But people are free to put assets in trusts
that bypass the future partners of a spouse.
Also problematic are ambiguous, illegal or impossible-to-satisfy provisions—such as one that required a
treasured snowball collection to be preserved in a freezer. (What if the electricity went out?)
What is allowed varies according to state law. A Missouri court once struck down as too vague a provision
requiring brothers to be capable of "prudent exercise, control and ownership" of a piece of real estate so that
"no further danger shall exist."
But vagueness didn't prevent Northern Trust Chief Fiduciary Officer Hugh Magill, based in Chicago, from
recently requiring a man in his mid-50s to prove he was "of sound mind, good moral character and temperate
financial habits"—as a trust for the man required. Among other things, the heir submitted three years of tax
returns, a financial statement and a letter of support from his minister; he got the money.
What about religious restrictions, such as mandating that tuition payouts be used for a parochial school?
Courts often uphold them if they don't violate other rules.
It is harder to predict the outcome of demands that an heir marry within a certain faith: An Ohio court
validated such a provision in 1974, but an Illinois appellate court struck down another in 2008 (on public-policy
grounds) and the state's Supreme Court sidestepped the issue. "Norms may be changing on this issue," says
Ms. Wolven of Horwood, Marcus & Berk.
People who want to take advantage of this year's gift-tax exemption should beware of one giant constraint:
The Internal Revenue Service will deny tax benefits to a trust if the person who sets it up retains control,
either himself or through an agent.
Although new laws in some states allow trust modifications for shifting circumstances, experts say taxpayers
shouldn't push these limits because they could wind up with a trust but without a current tax break.
Diving Into the Details
Here are more specifics to consider before setting up a trust or tinkering with a will.
Who is included? This is one of the most important decisions to make at the outset; much leeway is allowed,
but taxpayers need to be clear given changing social mores. For example, consider carefully the definition of
"spouse"—and decide whether that includes same-sex partners, and whether they have to be in a registered
or long-term partnership.
Likewise, if a trust is to benefit descendants, make sure to define the term. Do adoptees count, or
stepchildren, or the child of a surrogate? Is a child conceived with frozen sperm a descendant?
"Even experts are struggling with how to draft language on some issues," says Mr. McDonald.
Then there are decisions to make about shares. For example, if a matriarch's daughter has four children and
her son has one, she will need to consider whether payouts to the grandchildren should be "per capita" (each
gets the same amount) or "per stirpes" (the son's child gets one-half and the daughter's children split onehalf).
Many trusts also have "spendthrift" provisions preventing creditors from reaching trust assets, although the
wall doesn't extend to claims for child support or taxes.
Incentive provisions. Want to promote your descendants' productivity by matching their income, or providing
funds to help them start a business? Would making payouts to a stay-at-home parent of young children
strengthen family ties? Many givers think about including incentives in trust or wills.
But experts counsel caution: "It's impossible to foresee every circumstance," Ms. Wolven says. What if you
match income dollar for dollar, and the heir wants to enter a worthy but low-paid profession like teaching?
Norm Benford, an attorney at Greenberg Traurig in Miami, remembers a carefully written trust that matched
private-sector pay one for one, public- and charitable-sector pay four for one and "sacrifice" public-sector pay
(like the Peace Corps) six-for-one—but the heir became a jazz musician and didn't qualify for a payout at all.
That said, Ms. Wolven says she recently set up a trust for a younger person who had become wealthy and
wanted to help his extended family. He empowered the trust to make loans to relatives for education, travel
and mortgages. As long as the borrowers repay on schedule, the trust forgives half the payment. The trustee
also can suspend collection if the borrower goes through a rough patch.
"It's a good structure for helping loved ones without encouraging lack of productivity," Ms. Wolven says.
Experts also caution about inserting a requirement to test heirs for drugs, because it can be hard to find a
trustee willing to undertake this intrusive supervision.
"Heirloom asset" trusts. People set these up to hold a treasured asset, such as a vacation compound, in trust
for heirs to enjoy. Mr. Magill recommends endowing the trust with sufficient funds so heirs don't wind up
squabbling about maintenance of the asset. Sometimes such trusts make payouts for transportation costs so
that far-flung relatives can visit.
Pet trusts. Leona Helmsley wasn't wrong. Experts say such trusts are a good idea if the owner is worried that
informal arrangements might fall through after death, because otherwise the pet is at risk of being
euthanized.
Typically the owner chooses a trustee, specifies the care to be provided and endows the trust with sufficient
funds.
"No contest" provisions. In some states, people can bar heirs from receiving payouts from a trust or will if
they challenge it in court. Sometimes the law voids these provisions, known as "in terrorem" clauses, if an heir
challenges the will and wins.
It is wise to think carefully before encumbering a trust or will with this or other inflexible constraints, even if
such moves are legal. Experts say one of the chief aims of planning should be to avoid leaving a "legacy of ill
will." No matter how much money comes with it, that's the worst legacy of all.
Aug 3, 2012
Europeans shun risky investment for safe life insurance
By: Myles Neligan
LONDON (Reuters) - Europe's two biggest insurers, Allianz and Axa , beat profit forecasts on Friday as
customers, weary of years of financial market volatility, shunned risky investments for the comparative safety
of traditional life insurance.
Allianz, Europe's No.1 insurer, made an operating profit of 2.37 billion euros ($2.88 billion) in the second
quarter, up 2.8 percent on a year ago, and ahead of the 2.2 billion penciled in by analysts, it said on Friday.
Second-ranked Axa also beat forecasts with net income of 2.6 billion euros in the first six months of the year,
outstripping the 2.11 billion euros expected by analysts.
Both companies benefited from resilient sales of traditional life insurance contracts which carry little or no
investment risk, in contrast to products such as unit-linked policies where customer returns depend entirely
on market performance.
"The customer assumes correctly that Allianz is more stable than his own government," Allianz finance chief
Oliver Baete told reporters on a conference call.
Shares in Allianz and Axa were up 3.2 percent and 3.4 percent respectively by 6:38 a.m. EDT (1038 GMT),
outperforming a 2.75 percent increase in the Stoxx 600 European insurance share index <.SXIP>
"All the big companies have been trying to push the plain vanilla products," said a London-based analyst who
asked not to be named.
"When people are nervous about the economy, health insurance is probably an easier sell than, say,
pensions."
European equity markets have fallen steeply in volatile trade since the onset of the credit crunch in 2007, with
the subsequent euro zone sovereign debt crisis adding to the turmoil.
Sales of traditional life products at Allianz rose 3.5 percent to 5.8 billion euros in the second quarter, while
premiums from riskier investment-focused policies fell 4.2 percent to 7.1 billion euros.
The German insurer said sales had been strong in critically-indebted Spain and Italy, which have suffered
credit rating downgrades amid austerity measures designed to shore up membership of the euro zone.
France's Axa said its life insurance arm benefited from a 5 percent jump in sales of traditional health and
protection policies, while savings products were down 6 percent and unit-linked premiums fell 3 percent.
Axa's overall life insurance profit rose 3 percent, lagging a 4 percent increase at its property and casualty
(P&C) division thanks to rising prices in several European markets.
"We have a strong trend in our protection and P&C markets, but it's tougher in savings because of the
economic situation, " Axa fiancé chief Gerald Harlin told reporters.
Allianz's life insurance operating profit jumped 20 percent in the second quarter, outweighing a 16 percent
decline at its property and casualty insurance unit as claims from heavy flooding in Thailand last year
escalated.
August 5, 2012
Regulators Probe 'Captives'
New York Regulator Wants to Know If Dealings Are Masking Financial Health
By: LESLIE SCISM and SERENA NG
New York's top financial-industry regulator is investigating whether life insurers are potentially masking their
financial health through dealings with related companies, according to people familiar with the probe.
The state's Department of Financial Services in mid-July sent letters to about 80 life insurers, including large
companies like MetLife Inc., seeking details about their financial arrangements with affiliated entities known
as captive insurance companies, the people said.
Many of these entities are incorporated offshore or in other states and were set up specifically to take on
responsibility for certain types of policyholder claims from their parent companies.
New York regulators, led by Benjamin Lawsky, superintendent of the New York State Department of Financial
Services, are looking for potential risks in these "reinsurance" transactions, the people said.
New York's probe is part of a broader state effort to resist any potential watering down of insurance-industry
solvency standards. Mr. Lawsky last month questioned the wisdom of a plan supported by many state
regulators to revise rules on how life insurers set up reserves, because it would rely more on insurers' own
modeling.
In this instance, the New York regulators are concerned that some insurers may be shifting significant liabilities
off their balance sheets onto these entities, which have laxer funding requirements than New York-regulated
companies.
The nightmare scenario is a repeat of the 2008-09 financial crisis, or a severe worsening of the economy, that
would leave the insurers short of the money they need to make good on claims.
The life insurers face a Wednesday deadline for providing the information, according to the people. MetLife
and Lincoln National Corp. are among the users of such related entities, according to securities filings.
In a statement, MetLife said that it, "like many life-insurance companies," uses captive reinsurers to help
satisfy certain reserve requirements related to universal-life and term-life insurance policies. The
arrangements "meet regulatory requirements," MetLife said. Lincoln declined to comment.
In general, states require life insurers to conservatively estimate future claims obligations and to have bonds
and other assets on hand to pay those claims. State insurance regulators note that few life insurers got into
serious trouble during the 2008-09 economic meltdown, even as scores of banks collapsed.
Many insurers contend the current formula-based reserve requirements result in claims reserves that are far
bigger than necessary. Many state regulators allow insurers to establish captives or other entities into which
they transfer some of their liabilities.
In these states, the entities are allowed to use letters of credit from a list of qualified banks, or in some
instances even the guarantee of the parent company, to pump in more money if necessary at some later date,
for a portion of the entity's financial structure.
To deal with the insurers' concerns about the reserve requirements, the new modeling-based approach to
reserve calculation is under debate at the National Association of Insurance Commissioners, an organization of
state officials that sets solvency standards for adoption in many states. New York often has stricter rules than
other states.
The NAIC also is reviewing the captive issue. It launched a study early this year to address "potential concern
that a shadow insurance industry is emerging, with less regulation and more potential exposure than
policyholders may be aware of," according to the group's website.
Typical of the arrangements is one in place at MetLife since 2008. Its Vermont-based captive obtained a 30year letter of credit from Deutsche Bank AG, which is committed to providing $2.4 billion, according to
securities filings and people familiar with the transaction.
The cost to MetLife was significantly less than the cost of issuing debt or selling stock, and the bank
arrangement enables it to stay within leverage ratios used by credit-ratings firms.
MetLife doesn't expect the letter of credit to be drawn upon, saying it supports "noneconomic reserves,"
referring to the portion of reserves required by regulation but above the company's estimate of needed
reserves.
If the letter is drawn on, Deutsche can demand repayment from MetLife, the people familiar with the
transaction said. If the parent company is unable to reimburse the bank, Deutsche could declare MetLife in
default of its obligations, which could trigger payouts on credit-default swaps tied to MetLife's debt, these
people said.
Such a possible outcome, while highly unlikely, concerns some regulators because of the potentially
destabilizing impact on a company's insurance subsidiaries.
The MetLife spokesman said any such debt default "would have no impact on policyholders" because its
insurance units are properly capitalized.
"I absolutely think policyholders can sleep soundly at night," said David Provost, a deputy commissioner in
Vermont, speaking generally about captives in that state.
Other insurers, including Lincoln, have captives that use bank letters of credit. In 2010, for instance, Lincoln
said certain of its subsidiaries had entered into a $550 million, 10-year letter of credit from Credit Suisse AG to
support regulatory capital requirements for its life business.
In Iowa, insurers setting up captives are required to hire an independent actuary to review their modeling of
reserves, and the state hires its own actuary, to protect policyholders, said senior insurance regulator Jim
Armstrong.
"The last thing" the state wants "is a troubled company in Iowa," Mr. Armstrong said.
My husband and I have been told we need a
revocable trust. Why not just a will?
There are several reasons you might want one. You can use a revocable trust (also called a living trust) to set
conditions on how your assets are used. Putting assets in a trust speeds up a will's settlement: "It would save a
lot of money," says Reno attorney Bradley Anderson. Plus, a trust enables big tax savings, assuming your net
worth is in the millions; if the assets of the first of you to die go to a trust, the surviving spouse will have a
smaller taxable estate.
That said, setting up a trust is expensive — about $2,800 to $5,000, on average. And a revocable trust — which
you can cancel or alter while you're alive — requires retitling your assets. If you think a trust makes sense for
you, consult an estate attorney. You can find names in your area at naepc.org
What's the risk that the IRS will start taxing Roth IRA
withdrawals?
It's low. There's no discussion in Washington of taxing them. And even if Congress did tinker with Roth IRAs
someday — perhaps taxing withdrawals or eliminating Roths altogether — such changes probably wouldn't
affect money already invested, say tax experts. "There would certainly be an uproar," says Tax Policy Center
co-director Eric Toder.
If you're still worried about this theoretical risk, remember that your alternatives, such as pretax contributions
to a traditional IRA or 401(k), carry risks too: Tax rates could be higher when you make withdrawals. To hedge
your bets, it's good to keep assets in accounts with different types of tax treatments.
How much do my spouse and I need to self-insure for
long-term care? Is $400,000 enough?
You need total retirement savings of $1 million to $2 million per person to cover most long-term care needs,
say financial planners and long-term care experts. Thirty-seven percent of adults age 65 will need to be in a
nursing home or assisted-living facility in their lifetime; the average total stay is one year, according to the
informational website longtermcare.gov. You can get a sense of prices in your area from Genworth (look for
the company's "Cost of Care" data).
If you choose an LTC policy instead, keep the premium below 7% of your retirement income, advises Marilee
Driscoll, author of The Complete Idiot's Guide to Long-Term Care Planning. To be safe, budget for premiums to
rise 10% per decade, she says.
April 7th, 2012
Whole Life Insurance Distributions, the “Whole” Story
By: Brandon Roberts
Life insurance agents love to fight over meaningless figures in an attempt to inflate the importance or
attractiveness of their products. Truth is, current facts and figures aren’t going to matter all that much. I’ve
mentioned before that design is super crucial, and I’ve also hinted at the notion that there are core attributes
that make some products better than other. There isn’t really a blanket list of features regarding these
attributes, so a little consulting with a knowledgeable agent is prudent. To highlight my point, however, I’m
going to dive into the topic of policy distributions. This will become part of many posts discussing different
features and why they matter. Throughout all this, you’ll begin to understand why it’s difficult to recommend
one carrier as better than all the others, as they can be varied in where they are strong (i.e. one size–or
carrier–does not fit all).
Northwestern Mutual Is…
I’m sure we could have a field day asking people to fill in the blank. The amusing words and phrases that come
to mind is a little fun to ponder (at least for insurance agents). I bring up the old Quiet Company, because it’s
career agents are famous for declaring its products the best at everything. They also like to inform their
prospective clients (identified as anyone who is unfortunate enough to sit within ear shot of them) that their
Whole Life product is the best one on the market–unconditionally. Most people possess the mental powers to
see through this embellishment, but since NML has developed such a crazy reputation, I’ll put them in the
cross-hairs of making an example out of them to illustrate my point.
There’s seems to be a ubiquitous page in the old NML training manual that instructs all agents to quote a
“study” conducted by an independent third party that declares NML to be the best. If you push hard enough,
some NML agents might actually produce the “study” for your review. The “Study” (if you’re getting sick of
that word, no worries I am, too) is actually the results of customizable reports an agent can create with Blease
Research’s Full-Disclosure–a comprehensive repository of facts and figures on a wide array of life insurance
products. The specific report in question is a historical comparison of “actual” policy performance, which
shows that for the past 20 years NML–SBLI–have been about tied for higher IRR performance on a $250,000
death benefit whole life product issued at preferred best to a 45 year old male. Impressive, let’s all run out
and buy a policy from NML, right? Not so fast…
Ignoring the obvious fact that this only proves 45 year old males in good enough health to receive a preferred
best policy from NML (or SBLI, they get ignored a lot, poor little company from Massachusetts) and wanting
$250,000 in coverage on a base whole life policy would have ended up with the highest IRR on cash value 20
years ago if they had opted for the Quiet Company (or the No Nonsense Company), let’s spend some time
wading through whether or not we really care that this fact even exists in the first place.
Life Insurance is a Terrible Investment Says the…
Person who doesn’t realize fixed insurance products aren’t investments. Anyone who says something like
“you could use your whole life policy like an investment…” is someone you should run far and fast away
from. Why? Because FINRA and the SEC regulate what can be considered “investments” and fixed insurance
products aren’t on that list. Doesn’t mean they can’t appreciate in value, doesn’t mean you can’t make money
off them, but it means they are not investments, and should not be treated as such. Savings plan, now there’s
a different story.
Nonetheless, the investment types among us who declare whole life a terrible…whatever…tend to declare it
so categorically. When pressed, you’ll get most of them to admit they make this proclamation based on rate
of return cash surrender value wise vs. hypothetical models for investment strategies (based on assumed
portfolio returns that are plucked from the air). So, whole life insurance is a terrible…whatever…based on
their set of rules. Are those rules necessarily important? NML likes to fight the fight and say yes, but this
willingness to fight originates from a laziness to accept their model because taking the time to convince you
that there’s a more important ball to keep your eye on (these guys recommend American Funds by default, so
there’s your first sign they may not dedicated to anything more than the same cookie cutter approach the
investment salesmen prescribe to, only whole life insurance is their primary weapon of choice, even a good
product poorly executed can be a huge mistake).
So, the terrible advice championed by investment salesmen is also pushed by the NML agents, the same “I can
get you a better rate of return” business by which they live (and die).
How can Rate of Return not matter?
It’s not that it doesn’t matter, it’s more that it’s not the most important consideration. There are plenty of
more important considerations when it comes to an overall financial plan. Rate of return ranks lowly among
these considerations because it’s a variable over which you have practically no control. There are a lot of
variables to consider, but today we’re going to focus on distribution.
So NML makes a big deal out of their internal rate of return on cash value for their whole life policies, and they
lean on historical data put together by Blease to convince you (and maybe even themselves) that what they’ve
got is undeniably the best. However, there’s a “study” out there that you won’t see NML agents touting and
disseminating.
This report, also from Blease, compares the distributions from various policies given a constant premium
($10,000) paid for 25 years and then distributions for 20 years immediately following. Here are the results:
Distribution Comparison Whole Life Blease
Now, it’s important to note that these figures are based on projected results, so the numbers in absolute
terms are not necessarily something we can rely on. But, there is something much more important we can
glean from this data. The important take away is the ability to access cash in the policy by looking at
distributions relative to cash value. The winners here are Penn Mutual, Ohio National, and Security
Mutual. Northwestern fairs pretty badly actually. It’s certainly no winner, not in the sense it would like to
convey in the IRR comparison. For every dollar in cash surrender value in the Penn, ONL, or Security Mutual
policies you can access roughly 7.5+ cents. NML on the other hand only allows about 5.7 cents. Based on
what we know about design and Paid-up Additions (even more coming in the very near future) this is much
more easily controlled than one might think.
In fact, as much as this report helps us analyze policies in a different–and I’d say more useful to the end user–
way, it still misses the mark on how a policy should be properly designed when retirement planning is the key
goal. That’s a huge digression that I’m not about to make. We will, however, entertain this subject in the very
near future.
The big take-away today is distribution matters. The mechanics of a particular policy can make it either really
good at distributing the cash inside it like what can be found at Penn Mutual, Ohio National, or Security
Mutual (a tiny insurance company located in Binghamton, NY once known for its supremacy in the 412i
market) or bad like NML, Thrivent, and Country Financial (a company who is on top of the IRR comparison, but
certainly not winning on the relative distribution side). Don’t be fooled by the who has more money in the
policy game, it’s a slight of hand trick used to pull your attention away from the the topic that really
matters. So, if you’re wading through ledgers from illustrations handed to you from an insurance agent. Ask
for distribution figures, and compare those against other policies, not the cash value in certain in any given
year.
August 10, 2012
Are You Worth More Dead Than Alive?
By: JAMES VLAHOS
‘Do you see lights?” Ruben Robles asked his brother, Mark, in 2007. Bright, star-shaped and white, they
flashed before Ruben’s eyes while he was driving, shopping at Costco, feeding the cats. Mark didn’t see
anything, so Robles went to a doctor, who thought that the visions might be stress-induced. Robles ran a
collection agency in Los Angeles, and the hours were long, the debtors argumentative. Several weeks later,
Ruben began suffering seizures. He went to see another doctor, and this one ordered an M.R.I., which
revealed a ghostly white orb on his left frontal lobe. The diagnosis was brain cancer. Only 36 years old, Ruben
was told that he might not live to see his 38th birthday.
Horrified, Robles says he thought constantly about God. But his crisis was practical as well as existential. Over
the next year and a half, surgeons operated on his brain three times, excising as much of the cancer as they
safely could. The side effects of the operations left Robles barely able to walk and unable to speak more than a
word or two at a time. He shuttered the collection agency. His wife left him, and Robles, needing daily help,
squeezed into his mother’s Chihuahua-filled apartment. The medical bills were mounting, and Robles was
worried: though he believed God would provide for him in the afterlife, what he desperately needed until then
was money.
Ron Escobar, a close friend of Robles’s, went to Carole Fiedler, an insurance expert, for help. Fiedler saw that
there was no vacation home or Google stock to unload. But Robles did have a life-insurance policy for half a
million dollars. Life insurance is designed to benefit the living, a spouse or heirs, not those who perish. But
Fiedler, who owns a firm called Innovative Settlements, knew that a life-insurance policy is an asset that can
be resold to a friend or stranger just as a car, boat or house can. In a transaction known as a viatical
settlement (for terminally ill patients) or a life settlement (for everyone else), the person selling his insurance
gets an immediate cash payment. The buyer, in exchange, is named as the beneficiary and pays the premiums
until the insured person dies. Life no longer afforded Robles a traditional way to make money, but to the right
investor, Fiedler advised, his imminent death was worth a great deal.
Selling your life and selling a house have more in common than you’d think. The seller puts a listing on the
market. Prospective buyers do research and get inspections; there are offers and counteroffers until the seller
accepts a bid. The seller doesn’t literally peddle his own life, of course, but his life-insurance policy. The
distinction is in many ways moot, however, as the sales value is inextricably linked to a cold-eyed estimation of
how much longer the seller has to live. In the case of Robles’s policy, a life-settlement company in Georgia,
Habersham Funding, expressed interest. Escobar shipped off six boxes’ worth of Robles’s medical records,
thousands of pages in all, to Habersham. The firm, in turn, analyzed the records and also had them scrutinized
by an external company specializing in life-expectancy analysis. Fiedler’s recollection is that the reports
confirmed the grim prognosis and that Robles had less than two years left to live.
Fiedler, for her part, tried to convince Habersham that Robles was knocking on death’s door. The sooner
Robles died, the fewer premiums the buyer would have to pay and the greater the potential value of his
policy. “I would never lie, but my job is to make my clients look as bad as possible,” Fiedler says. Habersham
opened its bidding at $250,000. “You’ve got to give us more money than that,” Fiedler recalls yelling during a
phone negotiation. “This guy is really sick!” The company bumped its offer to $305,000. Fiedler accepted, and
the stakes were set. The buyer’s profit would be the $500,000 insurance payout upon Robles’s death minus
the $305,000 settlement and whatever the company had paid in premiums. Escobar, meanwhile, was hoping
that his friend could beat the grim odds. “I told Ruben, ‘Look, they’re betting that you’re going to die,’ ”
Escobar says. “ ‘You’re betting that you’ll live.’ ”
Betting on when somebody will die seems so creepy that it’s hard to believe the practice is legal. Sure, people
pay good money to buy life-insurance policies, so perhaps that should confer the right to sell them as well. But
the freedoms of ownership are not unlimited, especially when it comes to anything related to life and limb.
Possession of and control over what happens to your own body is a fundamental human right. Nonetheless,
that hasn’t stopped cultures from banning prostitution, organ sales or for-profit surrogate parenthood. The
justification for such infringements upon bodily sovereignty is that people should be protected from financial
incentives to harm themselves, and you could argue that a life settlement creates just such an incentive. A
potential recipient, for instance, could try to win a larger settlement by offering a guarantee — if I’m not dead
in, say, five years, I promise to kill myself so that you can collect the insurance money. That situation is
admittedly far-fetched, but history has shown that when there’s a payday offered for someone’s demise,
unscrupulous people will step in to hurry death along. In 16th- and 17th-century England, for example, it was
legal to take out a life-insurance policy on a complete stranger, and as the historian Sharon Ann Murphy
wrote, “these speculative life policies too often resulted in the murder of the insured.”
There are no known cases of murder to collect a life settlement-linked insurance payout. The financial practice
originated not as a criminal scheme but as a way to help the terminally ill. In the late 1980s, people infected
with AIDS often had little time to live and a great need for money. In response, financial planners established
the viatical business. Flyers went up at gay bars and clubs encouraging people to sell their life-insurance
policies for quick cash. Some financial planners even trolled hospital wards to find customers.
As the 1990s drew to a close, brokers realized that their thinking had been too limited. “The investors who had
started this whole industry realized that the customer doesn’t just have to be someone who is terminally ill
with H.I.V.,” says John Kraemer, a life-settlement broker in Southern California. “They could be anyone with an
age or other health consideration that shortens life expectancy.”
Rebranded and redefined, the life-settlements business grew swiftly, reaching $12 billion in transactions by
2007. The recession has since walloped the industry, as have well-publicized cases of fraud, in which
unscrupulous brokers persuaded people to take out life-insurance policies expressly for the purpose of
reselling them a couple of years later. Only $3.8 billion worth of policies changed hands in 2010, but insiders
hope that the business will ultimately surpass its previous high. There are $18 trillion worth of active lifeinsurance policies in the United States alone, and very few people even know that they can sell their policies.
“The public awareness is next to nil,” says Clark Hogan, the managing director of Opulen Capital, a lifesettlements brokerage in Southern California. “The industry is in its infancy.”
Advocates of life settlements say that they offer fiscal relief in hard times, especially to seniors whose
retirement portfolios have tanked. “We need to be singing at the tops of our voices that selling your life
insurance is an option,” says Scott Page, president of the Lifeline Program, a large settlement company. For
potential investors, meanwhile, the pitch is that settlements offer a safe harbor. Let the Dow rise, let the Dow
fall; a death payout is an uncorrelated asset whose timing bears almost no connection to the mood swings of
the market. In addition, both sides participating in settlement transactions are winners: the policy seller is paid
upfront, and the buyer is paid even more later. Both parties are playing with house money — that of the
insurance company — and the only question is how it will be divvied up.
For all the supposed benefits, settlements still strike many people as creepy. They invert the traditional
incentives of life insurance. Insurance companies have always had an interest in you, the policyholder, living as
long as possible so that they can collect more premiums. Generally, you also want to live a long time, for
obvious reasons. But a settlement means someone hits the jackpot when you die, and the sooner that
happens, the more money that person makes.
Clark Hogan represents people who want to sell their life-insurance policies. To find new clients, he cold-calls
financial planners, accountants, attorneys and insurance agents. “Hey, good afternoon, Clark Hogan here,” he
said one afternoon at the end of last year. “I’m wondering if you’ve ever had a client surrender a life-insurance
policy and if you’ve considered a life settlement instead. . . .”
Seller’s agents like Hogan say that while it may seem wrong for strangers to profit from your demise,
settlements are a resoundingly pro-consumer innovation. In the casino of life insurance, the game is rigged.
The industry’s profit models rely upon the fact that more than two-thirds of customers lapse — stop paying
premiums — before dying, thus invalidating their policies before their beneficiaries can collect a cent. People
often have good reasons for doing this. A husband outlives his wife, the intended beneficiary. An elderly
woman with a dwindling pension decides that she needs money for medical care now more than her heirs will
need it later.
Policyholders have only one possible escape route beyond lapsing. If the policy has a redemption provision,
the customer can sell it back to the insurance company for a tiny fraction of its full face value. But this option
represents the prison of a monopsony, a marketplace with only one possible buyer. “You wouldn’t want to
buy a Ford and turn around 10 years later and find out that the only entity you could sell it to is back to Ford,”
says Vince Granieri, the chief actuary at the life-expectancy company 21st Services. Settlements let the
consumer shop a policy to multiple buyers and potentially get anywhere from 2 percent to more than 60
percent of its face value. For most people, discovering that they can sell an asset whose value rivals that of
their house is a joyful surprise. “It’s almost like finding money under the mattress,” says John Yaker, former
president of Quantum Life Settlements.
Hogan’s cold calls that day yielded two financial planners who offered to send settlement cases his way, but
receptive audiences aren’t the norm. One planner he called dismissed life-settlement brokers with an
expletive. Hogan curled over toward the speakerphone as if in abdominal distress but replied in upbeat tones.
“This is the fight I have to win on behalf of the financially distressed life-insurance policyholder,” he said, “to
persuade them that there are legitimate buyers out there serving an industry that’s trending toward
legitimacy.”
Life settlements have a dubious past indeed; as relatively new, poorly understood and, until recently,
minimally regulated transactions, they have been prime terrain for fraud. The most notorious scheme even
has its own acronym, Stoli, for stranger-originated life insurance, which typically targets the elderly. I spoke
with one couple — wealthy, elderly retirees in Florida who asked not to be named — who were routinely
approached to take out life-insurance policies. “Every other day you’d get invited for a free dinner at a highclass restaurant as an incentive to listen to a spiel on life settlements,” the husband said. That the couple
didn’t actually have insurance did not dissuade the pitchmen. “They would try to convince you to take out a
policy, hold it for a while and then flip it,” he said. The shady brokers offered to cover the premiums; after two
years the brokers would get themselves named as the beneficiaries on a policy and then wait for the couple to
die so that they could collect the insurance-company payout.
Such a scheme might not seem all that different from life settlements in which the policy seller wasn’t put up
to the transaction by a stranger — either way, you wind up having a third party that profits when the
policyholder dies. But life-insurance contracts specify that the person taking out the policy must be doing so
on behalf of himself, a relative or a business partner whose death would cause direct financial harm. So
insurance companies have argued that Stoli is fraud, a contractual violation, and state legislatures have
agreed. With the active support of the life-settlement industry, which wants to establish its legitimacy,
settlements are now regulated in all but five American states, and most of the new laws explicitly ban Stoli.
Last fall, hoping to raise awareness of his reformed industry, Scott Page created one of the odder viral
marketing campaigns ever to hit the Internet. In the video “I’m Still Hot,” the actress Betty White sits atop a
golden throne and raps about settlements to a bevy of shirtless male models. “I hooked up with the Lifeline/I
got big cash in no time,” White says. The video has been viewed nearly 1.5 million times on YouTube, clearly a
viral victory for Page’s Lifeline Program, though the message arguably gets lost amid the pecs and
octogenarian break-dance sequences.
To spread the pro-consumer message, the industry might do better simply to run advertisements featuring
real customers with settlement-fattened wallets. A client of Innovative Settlements named Arline Maisel, for
instance, obtained a settlement for her father after he received a diagnosis of prostate cancer. The family used
the money to rent a house in Colorado so that the sick father, his children and grandchildren could gather
together for what proved to be his final year alive. “All of this takes money, and lots of it,” Maisel told Carole
Fiedler. “I know that a lot of people think that what you do is macabre . . . but I can tell you that you are in
reality a dream weaver and a lifesaver.”
Fred, a retired engineer in Texas, agreed to explain the buyer side — that of settlement providers who invest
in the future deaths of policyholders — on the condition that his full name not be used. A decade ago, Fred
worked as a sales representative for a company called Vespers, which arranged viatical settlements for
terminally ill policyholders. The company then sold shares to investors who would be paid when those
policyholders died. Fred himself invested $200,000 in 10 different policies. The way it was supposed to work
was that he would pony up a share of the settlement award, typically less than 10 percent, and would receive
that same percentage, minus the premiums paid, of the death benefit once the insured person died.
Life-settlement investors, like those in other sectors, crave timely information about their holdings, and the
key metric for predicting portfolio performance is the health status of the policyholders. To acquire this
sensitive information, Fred says a Vespers representative would call and question the policyholders — or their
adult children, nurses and doctors — as often as quarterly. He would then receive tracking reports
summarizing what the company learned.
In the report for the third quarter of 2007, for example, Fred got updates for more than 100 policyholders,
each of whom is identified by name. He could look up one man and learn that “his health is fine.” He could
find out that the last time another policyholder was seen by a doctor “her condition [was] poor due to the
spread of her breast cancer.” The briefest entries in the tracking report heralded investments that paid off: a
name, followed by a notation like “03/31/2006 — Date Deceased.” To date, Fred has been paid for seven such
maturities. But his portfolio isn’t entirely closed out. “I still have three policies left,” he told me. “I’m waiting
on them to die!”
This sort of profit-motivated death watch disturbs people like John Cautillo, an executive for a food-service
company in New York. In June 2011, Cautillo helped his fiancée’s mother sell her life-insurance policy.
Quantum Life Settlements brokered the deal, netting a settlement of more than $2 million, which the family
used to pay off a loan taken out to pay for the insurance premiums. Cautillo says that he would “absolutely”
recommend the transaction to others. Yet the process is unsettling. “Someone owns my future mother-inlaw’s life now,” he says.
Investors like Fred take umbrage at the suggestion that they’re rooting for death. “We pray for all of our
people, that they would have a good life and be able to use this money” from the settlement, he said. Besides,
he knows what it feels like on the other side of the fence. He sold his own insurance policy a couple of years
ago and is now on the receiving end of calls from a provider wanting to know the latest on his health. Fred
laughs about this. “I say: ‘I’m still alive! I’m hanging in there!’ ”
Patrick Satterthwaite tested positive for H.I.V. in 1986, and by 1994 he had full-blown AIDS. At the time he
was working for the post office in Guerneville, Calif., and he recalls his doctors’ giving him two years to live. “I
looked at my situation and thought, Well, do I really want to spend the last two years of my life selling Elvis
stamps?” Satterthwaite says. With the help of Fiedler, he got a settlement on one policy he owned and an
accelerated death benefit on a second, netting him more than $250,000, which he used to buy cameras and
jewelry and to travel the world.
Today the money is long gone, but Satterthwaite, to his own amazement, is not. He’s 64 and in the past
decade has competed in triathlons and bodybuilding contests. His survival, due largely to innovative drug
therapies, is a medical triumph. It’s also a thorn in the side of the investor who was expecting him to die more
than a decade ago.
To mitigate the risk posed by death’s fickle nature, major investors try to acquire large numbers of policies, or
“lives”; the more they own, the more the law of averages smooths out the Satterthwaites in the portfolio.
“Small securities dealers may only buy 10 to 30 policies, whereas a bank or a hedge fund may buy 100 to 400,”
says Jason Moos, whose company, Sandor Management, acts as a broker for investors. The Lifeline Program
has completed more than 3,000 settlements.
Large portfolios also allow mortality to be packaged for sale in ways that, for better or worse, recall the
byzantine ingenuity of the subprime era. Settlements can be pooled, sliced and recombined into a dizzying
array of financial instruments, including ‘’death” bonds, derivatives, notes and swaps.
An investment firm called Centurion showcases some of the industry’s most creative ways of packaging
mortality. Steady returns are more important to clients than periodically stratospheric ones, so buyers for
Centurion’s “micro longevity” fund — a group of several hundred settlements — analyzed life-expectancy
projections and made policy purchases with an eye toward evenly spacing the deaths. The company
diversified acquisitions by sex, smoker status and the projected likeliest cause of death, from heart disease to
cancer. Pollyanna Wan, an investment adviser at Centurion, says that there might have been certain years
when the fund needed “more lives that are projected to mature.”
Diversity has traditionally been constrained because there are a limited number of insurance policies available
on the settlement market. This problem led Centurion to focus on “synthetic” mortality funds, or swaps. For
these, Centurion isn’t restricted to policies that are actually for sale. Instead, the company essentially bets on
when particular people, whose insurance policies remain owned by other entities, like large investment banks,
are going to die. Centurion thus benefits from a Walmart-size selection of lives rather than the limited supply
of the corner bodega. “It’s a little bit like going to a warehouse and saying, ‘What do you have in stock?’ ” Wan
says.
The science of predicting death is imperfect and evolving. The doctors and actuaries who provide reports to
the settlement companies start by reviewing the reams of medical records sent in for cases like that of Ruben
Robles. They identify all health issues and add or subtract months to the projected life expectancy, or L.E. An
L.E. report I saw for Fred, for instance, credited him for exercising “more than expected for age,” while the
long list of demerits included his high blood pressure, past heart attack and family history of cancer. Hoping to
advance the precision of medical underwriting, the L.E. provider 21st Services is currently reviewing the
Medicare records of some 10 million Americans who have died in the past two decades, analyzing the death
risks posed by 240 different medical conditions, singly and in combination. “By the time the study has been
completed, 21st Services will have by far the largest data pool on factors that affect mortality,” says Vince
Granieri of 21st Services.
An L.E. calculation of, say, 48 months, is no guarantee that the person in question will keel over exactly 48
months later. Instead, the “median L.E.” figure relied upon by settlement companies simply means that if
there are 1,000 people with the same medical status as the person being analyzed, you’d expect half of them
to be dead at the 48-month mark. Hoping to make this guesswork at least somewhat more precise — and to
reduce the chance of betting wrongly on a case like that of Robles — researchers for the settlement industry
have begun to parse socioeconomic factors as well as medical ones. For instance, rich people “are not going to
die as predicted, because they have the resources to stay healthy,” Wan says. Other life-expectancy consulting
firms analyze death trends based on the prevailing lifestyles of where people live, separating the mountainclimbing denizens of Boulder from the Big Mac-chomping residents of Bakersfield.
The most startling attempt to sharpen traditional underwriting comes from a company called Longevity
Insight, which recently began offering its analytics to the settlement industry. The company was formed in
consultation with Howard Friedman, a psychology professor at the University of California, Riverside, whose
breakthroughs in the science of longevity were set in motion two decades ago. At the time, Friedman
suspected that personality traits strongly influenced how long people lived, but proving that was a problem:
the necessary longitudinal studies would take decades and cost millions of dollars.
Then, by chance, Friedman realized that his data had already been collected for him. Back in 1921, a Stanford
University psychologist, Lewis Terman, selected 1,528 kids for a study on what demographic and psychological
factors enabled students to excel, in both their early years and later in life. The children were regularly
assessed even as they grew into adults, got jobs and had families. After Terman’s death in 1956, the project
was taken up by other researchers, who continued tracking the participants all the way into the 21st century.
That the study hadn’t been designed to analyze longevity scarcely mattered to Friedman: here was a large
group of people who had undergone standardized assessments from age 11 till death. Friedman and his
colleagues exhaustively mined the Terman data for statistically valid correlations between the “psychosocial”
profiles of the participants and how long they lived. “Surprisingly, the long-lived among them did not find the
secret to health in broccoli, medical tests, vitamins or jogging,” Friedman wrote in his 2011 book “The
Longevity Project.” “Rather, they were individuals with certain constellations of habits and patterns of living.”
Friedman’s findings buck much of the conventional wisdom on longevity. For instance, the cheerful study
participants were less likely, on average, to live to a ripe old age than the more serious ones, in part because
happy-go-lucky people are prone to “illusory optimism,” meaning they underestimate health risks and are less
likely to follow medical advice. Highly sociable people, on average, did not live longer than less gregarious
ones as is commonly believed, because they tended to drink, smoke and party more. Over all, Friedman found
a longevity edge for the successful nerds of the world, the scientist types over lawyers and businesspeople.
“The findings clearly revealed that the best childhood personality predictor of longevity was conscientiousness
— the qualities of a prudent, persistent, well-organized person — somewhat obsessive and not at all
carefree,” Friedman wrote.
Dustin Milner, the chief executive of Longevity Insight, and Friedman have developed a proprietary
underwriting system, “LITE,” in which they will administer intensive psychological reviews of people trying to
sell their life insurance. The results will be parsed along with traditional medical L.E. reports. Longevity Insight
can then advise settlement purchasers whether the insured is likely to die before the median L.E., on time or,
most worrisomely for a potential purchaser, late.
On a cold, clear morning in Los Angeles, Ruben Robles let me accompany him to the Cedars-Sinai Medical
Center for an appointment with his oncologist, Dr. Jeremy Rudnick. “How are you doing, how are you feeling?”
Rudnick asked brightly as he strode into the examination room.
“Good,” Robles said.
“How’s your movement?”
“Good,” Robles said.
Rudnick turned to me. “This is the way it goes every time,” he said. “He comes in and tells me he’s fantastic.”
In truth, Robles could have been better. Covering the short distance from the parking garage to Rudnick’s
office took him 10 minutes in a halting gait. When Rudnick asked what he had planned for the weekend,
Robles repeatedly said “cine, cine,” until Rudnick realized that he meant he was going to the movies. But
Robles’s movement and speech were slowly improving, the doctor said. Bottom line, Robles was bucking the
life-expectancy reports that projected his death as early as 2008. He was still alive.
For all the advancements that aim to make life-expectancy science more precise, death remains one of the
most uncertain certainties around. When you invest in an individual life settlement, you are placing a bet. And
bets hinge upon probabilities that can’t be controlled. For Robles, something has gone unexpectedly right in
the years since his terrible diagnosis, and it is beyond the reach of both social and medical science to fully
explain it. At Cedars-Sinai, Rudnick led us to another room and pulled up a series of M.R.I. images of Robles’s
brain. The earlier ones, from 2007 and 2008, showed the white mass of a glioblastoma spreading across his
left frontal cortex. But in the images after the third operation, in 2009, the frightening white blob didn’t
return. Rudnick estimates that fewer than 5 percent of patients in Robles’s condition do as well as he has.
“At some point, will the tumor flip a switch and start growing again?” Rudnick asked. “It probably will, but we
don’t know when. I’ve seen people with this kind of tumor who have been stable for 20 years. It defies all
odds, but somebody has to defy the odds.”