Letter: Investing requires understanding

Re: “Insurance agent pleads to scam” by Bill Lodge, The Advocate, Dec. 8.

Private individuals who are approached about an opportunity to apply for a life insurance policy with the promise of a profit to them as well as investors, such as individuals, trust funds or public retirement plans which are approached to invest in life settlements or in their derivative securities should pay heed to Bill Lodge’s report.

The case reported fits characteristics attendant to stranger originated life insurance transactions.

STOLI involves identifying party(ies) to apply for and purchase life insurance for significant amounts of coverage, often beyond what can reasonably be justified. The applicant who will be the proposed insured agrees to commit personal funds to pay for all or a portion of the premiums on the life insurance policy for an initial period of time, relying on a promise of a profit to them upon the intended future sale of the insurance policy through a life settlement transaction. The plan is to sell the policy sometime after the first two policy years. The life settlement broker may be the same party who originally sold the policy to the insured. If efforts to sell the policy are unsuccessful, the insured will not recoup any funds he had provided and will not realize the profit that had been promised to him/her. Life settled life insurance policies are often sold many times over until purchased by an ultimate investor. The ultimate investors can be individuals, mutual funds, trust funds, public retirement systems, etc.

Unfortunately there have been a number of cases where insureds and others have lost monies expended for premiums and have had legal penalties and judgements imposed on them. Investors have also lost principal and/or not realized the anticipated level of investment returns as result of relying on asset values and investment return projections that are too optimistic or, worse yet, as result of the life insurer successfully rescinding a life insurance policy after they invested in it.

Life settlements have a place and serve a purpose. Unfortunately practices followed by some are open to question.

In conclusion, whether one is a potential insured or is a potential investor, when it comes to dealing with life settlements good and clear understanding is vital. Appropriate advice from knowledgeable parties should be sought. After all, if it sounds like it is too good to be true it probably is ... too good to be true!

Peter J. Bondy

actuarial consultant, business adviser

Prairieville