No. 3: Medicaid and Life Settlements

Recently Texas enacted a law--and other states are considering laws--allowing the owner of a life insurance policy to sell it in the secondary market and use the funds toward long-term care expenses. Also, the arrangement supposedly would increase the assets the individual could retain and still qualify for Medicaid, and supposedly would lessen the state's Medicaid costs. Here I discuss such laws.

The Nature of Life Settlements

A life settlement involves the sale of an existing life insurance policy to an investor who speculates on human life. A typical life settlement involves a policy with a death benefit of at least $1 million on the life of a person at least aged 70. 

Life settlements almost never involve traditional cash-value policies, because such policies contain substantial cash values and secondary market participants are not willing to risk the large amounts necessary to acquire such policies. That is why virtually all life settlements involve universal life policies with small cash values or term life policies with no cash values. 

The net purchase price paid to the policyholder must exceed the policy's cash value because otherwise the policyholder would surrender the policy to the insurance company. However, the net purchase price must be well below the policy's fair market value because of the compensation of intermediaries and other expenses associated with life settlements. 

Illusory Savings

The Texas law and other proposed laws are an example of efforts by life settlement promoters to win public acceptance. For several reasons, however, the purported advantages for consumers and states are illusory. First, the Texas law refers to policies of more than $10,000, but the typical candidate for Medicaid owns little or no life insurance. Second, even for those who own policies of more than $10,000, life settlements are not usually feasible because, as mentioned, life settlements typically involve policies of at least $1 million. Third, most small policies are traditional cash-value policies and, as mentioned, are almost never used in life settlements. 

Other Efforts

Another example of efforts by life settlement promoters to win public acceptance is their attempt to have states enact laws requiring life insurance companies to disclose to policyholders the option to enter into a life settlement. That effort is made despite the fact that very few policyholders are candidates for life settlements, as previously discussed. 

The effort by life settlement promoters to enact Medicaid life settlement laws is analogous to the effort by long-term care insurance companies to persuade states to promote private long-term care insurance. A few states have developed "partnership programs" under which states encourage citizens to buy private long-term care insurance. The programs provide that, when the policyholder receives policy benefits, the benefits received increase by that amount the assets the person can own and still qualify for Medicaid. However, the assets are increased only to the extent policy benefits are paid. If a claim is denied, there would be no increase in the assets the person can own and still qualify for Medicaid. In the programs in California and Indiana, for example, letters were written on the governors' stationery urging citizens to return a reply card. The programs are schemes by list developers who sell the respondents' names to insurance agents. 

Conclusion

The Texas law and similar proposals will not reduce state Medicaid costs. Nor will they help consumers. In the July 2008 and January 2012 issues of The Insurance Forum, I described the California and Indiana partnership programs. Also, in the July 2008 issue, I explained why the characteristics of the long-term care exposure make it impossible for private insurance to solve the serious problem of financing long-term care.

No. 2: Revisiting My Suggestion about How to Avoid Problems Associated with Life Annuities

An annuity is a series of payments. In a life annuity, the payments are contingent on the survival of the annuitant. In an annuity certain, the payments are not contingent on the survival of the annuitant.

I do not have any particular concerns about annuities certain. Over the years, however, I have expressed serious concerns about life annuities from the consumer's point of view. In the August 2012 and November 2012 issues of The Insurance Forum, I offered a suggestion on how consumers may avoid the problems associated with life annuities. I was disappointed by the lack of response to the suggestion, and I revisit the suggestion here. 

My Concerns about Life Annuities
The buyer of a life annuity purchases insurance protection against living too long. One major concern is that it is impossible--without making crucial assumptions that are likely to be unreliable--to measure the price of the protection from the consumer's point of view. In other words, the consumer in effect has to buy insurance protection with an unknown price. 

Another major concern is what happens upon the death of the annuitant. In a straight life annuity, in which there are no further payments after the death of the annuitant, the annuitant's survivors receive nothing. In a life annuity with ten years certain, the survivors would receive nothing if the annuitant dies after the ten-year period, and would receive only the payments remaining in the ten-year period if the annuitant dies during the ten-year period. 

My Suggestion

The above concerns caused me, in my personal affairs, to search for an alternative that does not incorporate the life annuity concept. I decided to take systematic monthly withdrawals from my retirement accumulation. Each year I calculate the amount to be withdrawn during the year by following the procedure promulgated by the Internal Revenue Service in connection with required minimum distributions. I divide the yearly amount by 12 and round up slightly to determine the amount to be withdrawn each month. Because my retirement plan involves pre-tax dollars, I must meet the minimum distribution requirements. However, the system works just as well for retirement plans involving after-tax dollars. 

I have used the system for 15 years, and it has been functioning extremely well--even through the financial crash of 2008. To put it simply, there is little if any likelihood that I will outlive the funds. Furthermore, upon my death it is likely there will be significant funds remaining to be divided among my surviving family members. 

Conclusion

I do not know why I received no responses to my suggestion about using systematic monthly withdrawals instead of a life annuity. A possible reason is that following the suggestion does not provide agents' commissions. Yet the suggestion surely presents an opportunity for agents to provide a valuable service to their clients.

No. 1: Criminal and Civil Charges against Two Credit Derivatives Employees at JPMorgan Chase

In the June 2013 issue of The Insurance Forum, I discussed the report of an investigation by a U.S. Senate subcommittee staff into a $6.2 billion loss incurred by the London office of a unit of JPMorgan Chase & Company (NYSE:JPM) in the trading of credit derivatives. The staff report explains credit derivatives, mentions how articles published by Bloomberg and The Wall Street Journal (WSJ) in April 2012 initially broke the story, and describes in great detail how the loss occurred.

The Criminal Complaints
On August 9, 2013, a U.S. Attorney filed criminal complaints against Javier Martin-Artajo and Julien Grout, two JPM employees involved in the case. The complaints, filed under seal, were prepared by a Special Agent of the Federal Bureau of Investigation and approved by two Assistant U.S. Attorneys. The government charged the traders with conspiracy to falsify books and records, commit wire fraud, and falsify filings with the Securities and Exchange Commission (SEC). On August 14, the complaints were unsealed. (U.S.A. v. Martin-Artajo and U.S.A. v. Grout, U.S. District Court, Southern District of New York, Case Nos. 1:13-mj-1975 and 1976.)

The Civil Complaint
On August 14, the SEC filed a civil complaint against Martin-Artajo and Grout. The SEC charged them with violations of federal securities laws and regulations. (SEC v. Martin-Artajo and Grout, U.S. District Court, Southern District of New York, Case No. 1:13-cv-5677.)

The Indictment
On September 16, a federal grand jury issued a five-count indictment against Martin-Artajo and Grout. They were charged with: conspiracy to falsify books and records, commit wire fraud, make false filings with the SEC, and commit securities fraud; false books and records; wire fraud; false filings with the SEC; and securities fraud. (U.S.A. v. Martin-Artajo and Grout, U.S. District Court, Southern District of New York, Case No. 1:13-cr-707.)

According to a September 18 letter from an Assistant U.S Attorney to the judge in the case, Martin-Artajo was arrested in August in Spain, and a request to extradite him to the U.S. was pending. The letter also said Grout was residing in France, where he remained a fugitive. 

The "London Whale"
The headline of the April 2012 WSJ article was "London Whale Rattles Debt Market." The article identified Bruno Iksil as the JPM London employee whose huge volume of trades in credit derivatives roiled the market. The case became widely known as the "London Whale" case. 

Iksil has not been charged. He is cooperating with the prosecutors in their investigation. He is not mentioned by name in the criminal complaints, the civil complaint, or the indictment. In the criminal complaints and the civil complaint, he is called a "cooperating witness." In the indictment, he is called a "co-conspirator."

Conclusion
The JPM case is not directly related to insurance, but it contains important lessons for persons interested in the welfare of the insurance industry. I think such persons should follow developments in the case.