Massachusetts Governor to Tackle Life Insurance Fraud

life insurance settlements

Life insurance settlements have been controversial for years. While it’s clear that taking the route of selling life insurance policies to acquire extra cash seems harmless, lawmakers have always been concerned that the practice draws in undesirable schemers.

A bill that recently landed on Massachusetts Gov. Deval Patrick’s desk tackles insurance fraud via questionable life insurance settlements. As a result, stranger-oriented life insurance policies may soon be a thing of the past in the state.

What are Life Insurance Settlements?

Life insurance settlements are traditional life policies with a twist. Oftentimes, senior citizens realize that rather than have money available for beneficiaries when the die, they need the money from their policy at the current moment.

In this circumstance, the policyholder reaches out to an investor who purchases the policy from him or her at a fraction of the price (e.g. a one million dollar policy may receive $500,000 after cashing it in).

While this practice is considered legal in 42 states, it is questionable. In some cases, the purchase of a policy and subsequent life settlement agreement is initiated by a stranger under what have been labeled “stranger-oriented” policies. Lawmakers in Massachusetts believe this practice is a form of life insurance fraud and should be prohibited.

Massachusetts Lawmakers to Tackle Life Insurance Fraud

A new bill (H 4296) that was created to regulate life insurance policies cleared the Legislature during the final days of the 2011-2012 session. The bill prohibits “stranger-originated” policies while protecting consumers who contract for life settlements, according to House Majority Leader Ronald Mariano (D-Quincy).

In the case of stranger-oriented policies, investors often contact a prospective policyholder, encourage him or her to purchase a policy, loan the money to make payments, then assume ownership of the policy.

Because the investor at the time of the policy’s origination has no insurance interest in the life of the insured, these policies violate the state’s insurance interest laws, according to the legislation. The new bill would prevent this occurrence by requiring individuals to own a policy for two years before being able to sell it.

Advocates of the bill hope that, if passed, it will help consumers who fail to recognize the full financial and tax implications of their decision. Gov. Patrick has been given until Thursday to act on the bill.