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The Larry King case: How not to do a life settlement
For anyone considering entering into a life settlement, TV host Larry King's experience offers a cautionary tale. Life settlements are transactions in which a life insurance policyholder sells his policy to a third party because the policy is no longer needed and/or wanted. The new owner takes over premium payments and receives the full death benefit when the insured dies.
|King had little understanding of the financial transactions to which he was agreeing.|
Generally you would enter into a life settlement because your beneficiaries no longer need the funds or your premium payments have become unaffordable.
The 73-year-old King thought it was a way to make a quick buck — or a quick million bucks.
According to a lawsuit filed in October 2007 in U.S. District Court in Los Angeles against the Meltzer Group insurance brokerage, in February 2004 King bought a new life insurance policy for $10 million and within a few weeks resold it for $550,000, under the advice of the Meltzer Group. He also held a $5 million policy from 2002 that he was advised to keep, even though the premiums were higher than the policy he "flipped."
In October 2004, King says he was contacted again by the Meltzer Group and advised to buy a new $5 million policy to flip, plus sell the older $5 million policy for $850,000, and he did.
But apparently King had little understanding of the financial transactions to which he was agreeing. He now alleges that he should have received "millions of dollars more" for his life settlements and that the deal was not in his financial best interests. In addition, King claims he was unaware that due to his age and declining health, he may have trouble securing future life insurance.
What we can learn from Larry King
King's lawsuit shows that he neglected to ask necessary questions before signing his life settlement paperwork. Here's what King should have asked:
- Does my family need the policy's benefits when I die? Only unneeded policies should be considered for life settlements, which should not be regarded as ways to make a tidy profit. King's lawsuit says, "No defendant analyzed whether the new $10 million policy could have better served Plaintiff and his family as life insurance instead of selling it for $550,000." The suit claims the same for the older $5 million, saying it would have better benefitted King's family as a death benefit than as a life settlement.
- Can I get more for my settlement? A smart policyholder who wants to do a life settlement will shop around his policy to get multiple offers, or use a broker to do that work. King alleges he should have gotten millions more.
- If I decide I need insurance after my settlement closes, will I be able to buy a policy at my age and health? Sure, buying life insurance is a snap when you're in your 30s and healthy. Buying a new policy when you're 73 with a history of heart attack and diabetes, like King, gets close to impossible. King says he wasn't aware that he might be uninsurable after his life settlement: His broker didn't consider King's "then current financial position, health condition and the insurance needs of his family, including the likelihood of his future uninsurability."
- Does my attorney have expertise in life settlements? Life settlements are complex financial transactions. King's lawsuit says that "both Plaintiff and his then attorney lacked knowledge and expertise" in life settlements.
- What fees and commissions will I pay to the players in the transaction? King believes he paid commissions, bonuses and other fees in excess of $500,000 when he was talked into buying the $10 million policy. Then weeks later he paid further commissions for the life settlement. King really isn't sure because he says there was no disclosure about what others received in the transaction.
- What are the tax consequences for selling my policy? A life insurance benefit is paid to your beneficiaries tax-free, but proceeds from a life settlement are taxed as ordinary income. King's "estate would have benefitted more by retaining the new policy as protection for his estate with no tax consequences rather than selling it for $550,000 with ordinary income tax payable on the proceeds," says the lawsuit.
- Who will be the new owner of my policy and can it be resold? King's lawsuit says he has no idea who now owns his $10 million policy and who has a financial interest in his death. Furthermore, he says the buyer of one of the other policies, Coventry, is a "company of questionable repute" that is under investigation by the New York Attorney General for dishonest and illegal conduct.