Is This Wrong? Variable Annuities for the Terminally Ill

Variable annuities are sold by insurance companies as an investment vehicle. They are similar to 401 (k) plans. An individual invests money by purchasing the annuity which have a death benefit. Insurer’s typically guarantee that the investor’s beneficiaries will get back the amount invested plus a built-in interest return. The best part of the annuity is that it is guaranteed. Even if the market tanks, the insurer is on the hook for the full amount invested.

Enter the enterprising lawyer. Joseph Caramadre, an estate lawyer in Rhode Island decided he would try to game the annuity market. He ran ads and recruited terminally ill people that he would pair with investors. The investor would put up the money, the annuity would be purchased by the sick person and both would make money.

An article about this practice can be found here.

What do you think? Macabre? Bizarre? Morbid? Just good business? A smart loophole?

One thought on “Is This Wrong? Variable Annuities for the Terminally Ill

  1. I’m not prepared to comment on the legality or illegality of these transactions as I am no lawyer myself. Instead I will simply point out that it is the responsibility of an insurance company issuing a life insurance contract to underwrite the transaction before the contract is issued. I think it is one thing to say that a question regarding the health status of the insured was asked and the applicant lied in response to such a question. It is entirely another thing if the question was never asked on the annuity application. The latter is routinely the case with annuity applications, although in some special instances, for example where the annuity premium exceeds $1 million, a secondary set of underwriting questions, including the health status of the proposed insured, are aoften sked.

    The presumption is when the question as to health status is NOT asked, the insurer acknowledges and accepts the risk that the health status may be substantially worse than for the contracts it would prefer to issue. That is the business of risk taking in which insurers choose to operate. It any event, it would seem to me that every insurer now complaining about this situation had the ability and the right to ask the health question on every application for a variable annuity with a guaranteed death benefit but intentionally chose not to do so, while understanding the risks that might be involved. You can’t have it both ways.

    Finally, this comment is not meant to suggest that outright fraud or illegal acts committed by an applicant in pursuit of the legitimate issuance of an annuity contract is condoned. Two wrongs do not make a right.

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