"Death Takes a Policy" - annuity loophole

[SSSS]

Very lengthy article about a variable annuity loophole that benefited buyers and frustrated sellers:

http://www.propublica.org/article/death ... fine-print

[xerty24]

Glad to see how he was able to benefit families in their time of need to the tune of thousands of dollars.

Alos funny to see how many times the insurnace companies have lost suing him in court (every time). The judge was not impressed with the insurance companies' defense that they didn't know/mean what they put in their own contract.

[Muchtolearn]

On the moral side the guy is disgusting to me. I assume there was fraud, etc, but that's not what piqued my interest. Basically they invested in variable annuities and they were beneficiaries. So the person dies and they collect the money. What is the difference if he just invested it outside an annuity?

[tludwig23]

...Basically they invested in variable annuities and they were beneficiaries. So the person dies and they collect the money. What is the difference if he just invested it outside an annuity?

It is the death benefit feature of the annuity that allowed him to take huge risks with the money without any fear of loss of principal. You don't get this outside of an annuity.

[norookie]

[TA_Lurker]

I assume there was fraud, etc, but that's not what piqued my interest. Basically they invested in variable annuities and they were beneficiaries. So the person dies and they collect the money. What is the difference if he just invested it outside an annuity?

For more information download the most recent edition of This American Life. They cover the story in depth.

http://www.thisamericanlife.org/radio-a ... /loopholes

[Phineas J. Whoopee]

What loophole?

I certainly agree it is emotionally distasteful to tie a money making system to anyone's death.

On the other hand, Caramadre and his company weren't harming the ill people or their families in any way. In fact, those people realized (small) benefits. Of course if he or his company were forging signatures or otherwise committing fraud they should be held accountable in criminal court, but the main thrust of the legal action has been civil.

It isn't as if nobody had thought of the idea of an insurable interest before. Life insurance companies were well aware of it. They chose to offer complex financial products unsuitable for most people, and intentionally made the terms opaque so the customers wouldn't notice what bad deals they were. That they were hoist with their own petard was their own carelessness.

As long as the state guarantee associations are able to pick up policies left over from any insurance companies which drive themselves out of business through poor decision making, the only losers I can see are the equity investors in those companies. With any luck those people are properly diversified.

As nisiprius recently said, you can't cheat an honest man. That certain insurance companies were trying to cheat customers is what made them vulnerable.

PJW

[Aptenodytes]

It is worth listening to the whole story, or reading the whole transcript. I recommend listening, because you can hear the voices of all the principles and the families of many annuitants.

The author of the story portrayed the scheme in very favorable terms. Unless some of the vague accusations of fraud are well-founded, I have no problem with any of it. The wealthy investors reaped a greater share of the risk-free gains than the families of the terminally ill people, as a result of extremely high information assymetry. But the annuitants got their money up front, rather than having to wait. Certainly both investors and annuitants came out ahead.

My guess is that if the insurance companies had been dumb enough to continue the practice indefinitely a new equilibrium would have emerged in which the gains were split more evenly. Eventually some entrepreneur would emerge to organize the practice on the annuitant side and exert some bargaining power. And eventually some other firm would figure out the scheme and start some competition. Once you have competition on the investor side and organization on the annuitant side you would get a redivision of the gains. Of course with all that activity taking place the insurance companies would have to take notice and rewrite their contracts, so the ultimate equilibrium is nobody gains anything.

[dratkinson]

Am I misunderstanding the insurance company's point? They don't expect any buyers of their product to benefit from it? And they are mad when someone does?

Would make a great advertisement. "If you buy our product and it benefits you, we will sue you!"

[dhodson]

at least then they would be honesty

[Aptenodytes]

Am I misunderstanding the insurance company's point? They don't expect any buyers of their product to benefit from it? And they are mad when someone does?

Would make a great advertisement. "If you buy our product and it benefits you, we will sue you!"

The This American Life piece was reasonably clear on this. They expected the annuitants and investors to be the same people, even though the contract didn't require that. And within that universe of customers they expected most of them would not exercise the insurance clause because their investments would have had positive returns. They were evidently collecting large fees on all these transactions which offset the small number of losses. According to the reporter, there was also great pressure to stake out large positions in the market to boost competitive power and balance sheets, so they thought they were gaining merely by selling lots of policies, over and above the direct profit/loss from the policies.This led them to undertake dubious moves such as offering extremely high risk options for the investments. Some investors took out two policies, investing all of one in a short index fund and investing all of another in a long index fund. They took all the high gains in the fund that turned out right, and cashed out the guaranteed principal in the other one. Clearly all this gaming of the system, no matter how legal, their business model could not tolerate in large numbers.

[fishndoc]

I didn't hear the very end of the story but I think he eventually had to stop

I listened to the story on This American Life, and after the insurance companies figured out what was going on and failed at civil suits, the FBI became involved, and brought criminal charges for fraud against him. Don't think it has gone to trial, and from what TAL reported, the case is weak (investigating FBI agents actually lied to some of their witnesses).
Sounds like the Insurance Industry called in some favors from the Justice Department.

[xerty24]

after the insurance companies figured out what was going on and failed at civil suits, the FBI became involved, and brought criminal charges for fraud against him. Don't think it has gone to trial, and from what TAL reported, the case is weak (investigating FBI agents actually lied to some of their witnesses).
Sounds like the Insurance Industry called in some favors from the Justice Department.

this seems to be a recent and unfortunate trend, where big business (like RIAA with MegaUpload or Nordstrom's with some enterprising shoppers) abuses the criminal justice system for what is at most a civil dispute and quite possibly just sour grapes when one party realizes belatedly that they were being foolish.

[SSSS]

Am I misunderstanding the insurance company's point? They don't expect any buyers of their product to benefit from it? And they are mad when someone does?

Are you surprised by this?

[mickeyd]

ING's Golden Select Premium Plus variable annuity

This seems to go along with my theory that the more complex an insurance company can name its product, the better it will be marketed.

[Jerilynn]

Why didn't the insurance companies do a medical check on the people who were dying before they issued the insurance? I thought that was common, no?

[SSSS]

ING's Golden Select Premium Plus variable annuity

This seems to go along with my theory that the more complex an insurance company can name its product, the better it will be marketed.

Kind of like third-world dictatorships putting things like "People's Democratic Republic" in their names?

[mickeyd]

Why didn't the insurance companies do a medical check on the people who were dying before they issued the insurance? I thought that was common, no?

I don't believe that there is a whole lot of life underwriting when it comes to annuities. Maybe that's why it worked.

[xerty24]

Why didn't the insurance companies do a medical check on the people who were dying before they issued the insurance? I thought that was common, no?

No medical underwriting for variable annuities, only for life insurance. Well, maybe now. The insurance companies were just too busy selling high fee variable annuities to young people as "investments" that they figured they wouldn't die any time soon nor would the market possibly go down for years at a time.

[Jerilynn]

Aha! Now it makes sense. Thanks folks.

[matjen]

Wow! Thanks for these links. Very entertaining listen/read. Fascinating how something like this can take on so many shades of meaning. I think it may tell you more about the person hearing the story (by their reaction) than it does about the actions of the participants. I was especially struck toward the end when Caramadre listed many of the other typical organizations that turn a profit from death: florists, cemetery, Church/Temple, pensions funds, etc.

[mickeyd]

many of the other typical organizations that turn a profit from death: florists, cemetery, Church/Temple, pensions funds, etc.

Funeral homes, attorneys, auction houses, insurance agents...

[fishndoc]

many of the other typical organizations that turn a profit from death: florists, cemetery, Church/Temple, pensions funds, etc.

Funeral homes, attorneys, auction houses, insurance agents...

and Family members if there is life insurance.

[jasc15]

Bump (Original Post was August 2012)

I just listened to the This American life podcast, which is the subject of this thread. Joseph Caramadre is in prison, and it seems that popular opinion is not very favorable toward him (to put it mildly). It seems that the criminal case (the existence of which seems quite questionable to me) did not go well for him, and he has changed his testimony and plea several times.

The TAL podcast depicted the situation (before he went to trial) in a relatively favorable light, and I didn't really have much objection with what he did. Reading articles on the matter, however, one might come to the opposite conclusion. With phrases like "...his role in an investment scheme that targeted terminally ill people" how could you ever think otherwise.

I think it's unfortunate that he faced criminal charges and prison time for actions which are, at worst, distasteful.