Deals that fund, then buy out, big life policies may shortchange seniorsThe deal offered to affluent seniors sounds awfully good: two years of free life insurance, plus a luxury car, a cruise, or a cash payment. All you have to do is take out a multimillion-dollar life insurance policy with a loan you're not obligated to repay and sell or transfer the policy in a couple of years.
The buyers? Small investment firms, which package and sell the policies to hedge funds, investment banks, and pension funds. The investors continue to pay the premiums and cash in on the death benefits when the insured seniors die. They see life insurance policies as desirable assets because the expected returns—about 13% a year, according to one study—don't correlate with returns from the stock or bond markets. While some firms have for years stood ready to buy policies that people no longer want or need, not enough come over the transom to feed institutional investors' growing appetite. So, some enterprising investment firms are trying to expand the pool available for sale by recruiting seniors to sign up for policies. Pitches for such deals have become "commonplace in affluent communities of seniors," says J. Alan Jensen, a partner at Holland & Knight in Portland, Ore., which has represented high-net-worth clients in these transactions. The marketing materials make these arrangements sound like a sure thing. "You have literally no risk," claims one brochure.
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