reverse life insurance?

lastsamurai · #1 08-20-2007, 02:38 AM

Has anybody heard of this?

I met a friend of mine on friday who is trying to sell me life insurance and he told me this option. It kinda sounds like a scam but I was wondering IF anybody has heard of this or if this is a loophole. This is the way he explained it to me.

1. Find a candidate who is about 60-65 years old.
2. An agent will write a 2-3 million dollar term policy on the subject and will put the bank as the beneficary.
3. The bank will 1099 you 150K where you have to 1099 the agent roughly 50K.

This seems logical but is this ethical? any insurance experts in the house?

superadvisor · #2 08-20-2007, 05:17 AM

I don't understand it. Why does the bank have to be the beneficiary if you are paying the life insurance premiums? Can the "subject" be a relative stranger? You have to wait for the person to die before cashing in?

wdcbooks · #3 08-20-2007, 08:00 AM

This doesn't make sense. You are also failing the test of 'insurable interest'. In other words, you can't go around buying insurance on random people. You need to demonstrate a hardship that would arise from that person's death.

lastsamurai · #4 08-20-2007, 10:35 AM

The subject is a relative like your dad, wife, ect.

No you dont have to wait for the person to die. You will get the check immediately.

And the bank pays for the premiums. You will just get the funds and 1099 the agent. So in theory if the bank did this for 100 people in their 60's within a 10 year and 40% dies the bank will collect the policy.

Freakin · #5 08-20-2007, 11:07 AM

[ QUOTE ]
The subject is a relative like your dad, wife, ect.

No you dont have to wait for the person to die. You will get the check immediately.

And the bank pays for the premiums. You will just get the funds and 1099 the agent. So in theory if the bank did this for 100 people in their 60's within a 10 year and 40% dies the bank will collect the policy.

[/ QUOTE ]

Doesn't this defeat the whole purpose of actuaries? They've made the insurance profitable for them, so why would 40% die and let the bank recoup their "investment?"

Am I missing something?

cbloom · #6 08-20-2007, 11:24 AM

Okay, I think I know what OP is trying to explain but he's got it all weird. It goes like this :

Find a relative who is old and likely to die soon.

You take out a big life insurance policy on them, maybe it costs $100k to buy and pays out $1M on death.

A bank or other investor calculates the current cash value of the note as something like $200k. They buy the note from you for $200k and it's signed over to them.

In practice, they actually just pay the note to begin with, so you get paid $100k up front and the life insurance pays to them.

The problem is why is the insurance company generating policies that are automatic profits. I dunno, but I've heard of this being done so there must be something else at play. Maybe there's some sponsored life insurance program which is guaranteeing certain payouts that are too high or something. Also possible if you don't die when you're supposed to then they take your house. There was an article in the New York Times a while ago about how there are investment pools of speculators buying these big policies for people but it didn't explain how they're getting policies with screwed up returns.

jively · #7 08-20-2007, 01:57 PM

[ QUOTE ]
2. An agent will write a 2-3 million dollar term policy on the subject and will put the bank as the beneficiary.

[/ QUOTE ]
Term insurance is extremely expensive for people that are 60-65. 50% of 65-year old men live to be 85. 50% of 65-year old women live to be 88. Term policies just don't make it into the 70's and 80's.

There are "life settlement" things that elderly people, brokers, and investors do. If you are elderly and have a permanent life insurance policy that you no longer need, you can sell it to another party. The sale price is based on your life expectancy at the time. On the other side, some people invest in these life insurance policies.

It's a bit gruesome; if people die earlier than expected then your investments do well. If there are medical breakthroughs, your investments do poorly.

-Tom

jively · #8 08-20-2007, 01:59 PM

[ QUOTE ]
Find a relative who is old and likely to die soon.

You take out a big life insurance policy on them, maybe it costs $100k to buy and pays out $1M on death.[...]

[/ QUOTE ]
Life insurance is priced based on the health of the insured. If they are about to die soon, then they are not insurable. If their health is just bad, the insurance will cost a lot.

-Tom

lastsamurai · #9 08-20-2007, 10:17 PM

[ QUOTE ]
Okay, I think I know what OP is trying to explain but he's got it all weird. It goes like this :

Find a relative who is old and likely to die soon.

You take out a big life insurance policy on them, maybe it costs $100k to buy and pays out $1M on death.

A bank or other investor calculates the current cash value of the note as something like $200k. They buy the note from you for $200k and it's signed over to them.

In practice, they actually just pay the note to begin with, so you get paid $100k up front and the life insurance pays to them.

The problem is why is the insurance company generating policies that are automatic profits. I dunno, but I've heard of this being done so there must be something else at play. Maybe there's some sponsored life insurance program which is guaranteeing certain payouts that are too high or something. Also possible if you don't die when you're supposed to then they take your house. There was an article in the New York Times a while ago about how there are investment pools of speculators buying these big policies for people but it didn't explain how they're getting policies with screwed up returns.

[/ QUOTE ]

This is exactly what he was trying to sell me.