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Preserving the purpose of life insurance

Posted On Thu, October 22, 2009

Florida's insurance commissioner recently noted that when it comes to life insurance, people need to be mindful of what is at stake when they sell their policies.

In a letter to Florida's Gainsville Sun newspaper, Florida Insurance Commissioner Kevin McCarty said that the practice of "life settlement" may be associated with fraud. Through life settlement, people - especially seniors - sell their life insurance policies to investors who continue to pay the premiums. The point is for investors to gain the death benefits when the insured person dies.

However, some unscrupulous investors may try to get older people to leave out certain information when getting a life insurance policy so they can get a larger payout. That information would include what the senior's net worth is.

McCarthy also said the insurance industry, and those who regulate it, need to figure out a balance between the right of people to sell their insurance with the practice of "stranger-oriented life insurance." The latter case has investors encouraging seniors to purchase life insurance to just sell the policy, a practice that is illegal in Florida.

"We as regulators must work to monitor the growth of these financial instruments, and encourage legislators on the state and federal level to preserve the core purpose of life insurance, to help individuals protect their family's financial security following their demise," McCarty wrote.

Recently, a report from ABC News noted that another financial crisis may be developing around the practice of life settlement. Investors who are grouping policies together and selling them may be creating a similar problem to the subprime crises that occurred recently in the economy.

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