Life Insurance Fraud Rescission and Contestability


Life Insurance Fraud Rescission & Life Settlements

Unfortunately, the large sums of money involved with life insurance mean that the industry has to protect against people setting up fraudulent policies and transactions. As a result there are three vital concepts that must be understood as they relate to a senior life settlement. They are; Contestability, Rescission and Insurable Interest.


Contestability Period and Life Settlements

The contestability period is the first two years a new life policy is in force. During this two-year period;

  • A death claim may be denied or "contested" (NOT paid) due to a fraud on the life insurance application or the suicide of the insured.

  • The life settlement value of a policy is typically higher after the contestability period. Investors assess less risk in owning policies after the contestability period.

  • An overwhelming majority of life settlement buyers will not purchase policies during the contestability period.

  • Life insurance companies do not like life settlements but are particularly averse to life settlement transactions during the contestability period.

Seniors should be aware that life insurance companies are not proponents of the life settlement market. The fact is that life insurance companies profit greatly when a policy lapses without them having to pay a death benefit. When a policy is sold to an investor in a life settlement, it becomes a virtual certainty that the policy premiums will be paid and the death benefit will have to be honored. Also, professional investors pay the absolute minimum premiums until the anticipated death of the insured. These factors lower life insurance company profits.

Seniors have every right to sell life insurance policies that have been acquired legitimately and the life settlement market provides them a profitable avenue to do that. However, seniors cannot just buy life insurance with the intention of selling it in a life settlement to make money. To do so may be fraudulent because life insurance applications all ask the intent of the buyer.


Rescission of Life Insurance and Life Settlements

A rescission is a cancellation of the life insurance contract by the issuing life insurance company. If during the two year contestability period the life insurance company suspects fraud it can rescind the life insurance policy. If the fraud is related to a lack of insurable interest at the time the policy was issued, the recession can take place at any time. Obviously, life settlement investors will only purchase policies that they believe are in good standing and without any fraud in the origination.

In order to rescind a policy the following conditions need to be met.

  • No death has occurred; i.e, the insured is still alive.

  • The company believes a fraud or misrepresentation was perpetrated on the application.

    • Medical information misstated.

    • Financial information misstated.

    • A misstatement of purpose that indicates bad insurable interest.

Insurable Interest and Life Settlements

"Insurable interest" is a concept dealing with the legal legitimacy of a life insurance policy and its beneficiary. The intention of life insurance is to provide a financial payment to the beneficiary after the death of the insured. The beneficiaries are typically the family, descendents, heirs, employers, businesses, business partners and charities of the insured. These are legitimate beneficiaries that qualify for "Good Insurable Interest".

For a life insurance policy to have legitimate good insurable interest, it is required that at the time of purchase, the intent was to benefit a legitimate beneficiary. If it can be shown that a policy was bought with the sole intention of making a life settlement then this would be considered "bad insurable Interest" or a "lack of insurable interest". In this situation, the policy was issued on fraudulent grounds and the applicant was acting as an agent on behalf of an investor and NOT for the reasons listed on the application form. This situation has the potential for a recession at any time. This could also lead to a contested death claim at any time well beyond the 2 years of contestability.

Life settlements are a complex area of law and one of the key reasons that seniors need experienced legal professionals and life Insurance professionals overseeing the process. These professionals should steer clients away from any shady transactions that create these circumstances that might lead to a rescission. Professionals should always make sure that any policy placed for a life settlement clearly meets the requirements for insurable interest.

  • Controlled by each state via code sections or common case law.

  • In most states insurable interest must exist only at the time a policy is issued. Afterwards, any owner and beneficiary are just as legitimate as the original beneficiary.

  • Bad insurable interest at the time a policy is issued is a potential reason for a CONTESTED DEATH CLAIM or a policy RESCISSION at any time.

  • A fraudulent statement on the initial life insurance application related to insurable interest could lead to a policy rescission or contested death claim many years AFTER the contestability period has gone by!

Arranging a life settlement in advance as part of buying a life insurance policy may lead to fraudulent statements on the life insurance application which in turn may lead to a finding of bad insurable interest which in turn may lead to policy rescission and/or a contested death claim.

Each state is responsible for creating and enforcing insurance laws and regulations. As a result the laws differ state by state and it is important to use experienced life settlement brokers and attorneys to ensure that all laws are being adhered to. Florida has some of the strongest life settlement laws: It is a felony to solicit life insurance for the purposes of creating a life settlement (Read statute).


About the author:

David Mickelson, ChFC, AEP is an expert in wealth strategies for seniors. He has helped hundreds of seniors with life insurance, life settlements and all aspects of estate planning.





 

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Important Laws To Know

Unfortunately, when there are billions at stake there will be people who try to manipulate the system. The legislature and Life insurance industry has developed powerful laws to insure the market stays fair and consumers are protected. Make sure your advisors can explain exactly where you stand.



Links:

Your best protection is to have an experienced senior settlement professional working for you.

Here are some great Life Settlement resources to help you educate yourself.