Through recent investigations, the Texas Department of Insurance (TDI) has become aware of activities which raise concerns that some life insurance agents, viatical settlement brokers, and viatical settlement companies may be engaging in fraudulent practices to sell life insurance policies for the specific purpose of viaticating the policies.
In and of itself, viaticating life insurance policies is a perfectly legal transaction authorized under the Texas Insurance Code, Article 3.50-6A. In such a transaction, a viatical settlement company arranges what is known as a viatical settlement whereby a terminally ill person (the "viator") agrees to sell his or her life insurance policy for a discounted value. Typically, a viatical settlement company purchases the policy or policies from the terminally ill individual and then markets fractional interests in the policy to investors. When the insured dies, the viatical settlement company, as the new owner or irrevocable beneficiary, is paid the face value of the policy.
It has come to the attention of TDI that some life insurance agents and viatical settlement brokers may be cleansheeting to sell life insurance policies solely for the purpose of viaticating the policy(ies). Cleansheeting is the practice whereby an individual, alone or in conjunction with a life insurance agent and viatical settlement broker, applies for one or more life insurance policy(ies) fraudulently by means of an omission of a material fact or by making an untrue, false, deceptive, or misleading statement in order to obtain the policy or to obtain lower premiums on the policy. Once the policy is issued, the life insurance agent and viatical settlement broker arrange for the insured to sell the policy to a viatical settlement company. The insured receives payment for some percentage of the face amount of the policy and the life insurance agent and viatical settlement broker receive a fee for brokering the arrangement.
When applicants for life insurance do not disclose their true health histories to insurance companies, policies are issued with premium rates that do not accurately reflect the risk category. Once the two-year contestable period has lapsed, the insurance company has no recourse to recover any payouts it is obligated to make.
Cleansheeting may be difficult for insurers to identify because insurers typically work with only one policy at a time. In isolation, one fraudulently obtained policy may not stand out from other policies. However, when policy data is analyzed in conjunction with other policies written by the insurer, some of the patterns noted below may become obvious and may indicate a pattern of cleansheeting.
- The targeted product is usually a whole life policy with a face value somewhere between $25,000 and $100,000. Because the application usually indicates good health and the policy value is relatively low, some insurers do not require a comprehensive physical examination or blood work. This practice called "jet underwriting" works well with the cleansheeting activity because the true risk is hidden from the insurance company. In general, the applicant is usually between the ages of 15 and 50 and has answered in the negative all medical questions designed to determine an adverse health history.
- Agents involved in these schemes are generally licensed and have appointments with many insurance companies.
- The policies sold by the agent generally have a high volume (usually one-third or more) of change in ownership to a third party. This change usually takes place within a short period of time from the date the policy is issued. This change in ownership may not be immediately reported to the insurance company.
- In many instances, policies are sold, and the viator signs a change of beneficiary form. However, many viatical settlement companies will hold the change of beneficiary form until the policy is beyond the two-year contestable period before filing it with the insurer so that the insurer will be unaware that a viatical settlement transaction has been consummated.
- Insurers that are informed by the insured of a change of ownership in the policy to that of a trust in the name of the insured should conduct more extensive due diligence regarding the issuance of the policy. In some cases, this is a sure sign that the policy is being viaticated. Viatical settlement companies will want to have control over the fraudulently procured policy. Once the policy is in the name of a trust, all that the viator has to do is resign as trustee and appoint someone at the viatical settlement company as successor trustee. Such an action does not and will not be reported to the insurer.
- In extreme cases known as "wet inking," the sick and elderly are offered incentives to secure life insurance policies for immediate resale. The applicant's answers to health questions may be deceptive or misleading.
- A common pool of viatical settlement companies may appear to be purchasing the fraudulently obtained policies time and time again and will appear as the new owners of the policies. This should raise questions because a viatical settlement company would seemingly only want to purchase the policy of a terminally ill person to maximize investment returns. If the insureds reported an excellent health history to the insurer, one would wonder why a viatical settlement company would be interested in these type policies.
- TDI's investigation revealed a common practice for these life insurance agents and viatical settlement brokers is to sell a disproportionate number of policies to out-of-state residents. In these policies, the policy applications may reveal that the applications were signed in the same location of the life insurance agent.
- The insured may have obtained life insurance policies with a number of other carriers. Generally, jet underwriting was used with all policies purchased. The same agent who sold the policy once again arranges for the sale of the policy to a viatical settlement company.
- If the Medical Information Bureau (MIB) is contacted to seek information regarding an applicant, the MIB records show anywhere from one to ten prior contacts.
- During the underwriting process, if a blood test or other diagnostic test is requested, the application for life insurance is withdrawn.
TDI suggests companies begin identifying these patterns as soon as possible to protect their financial integrity from these possible fraudulent practices. These patterns may then alert companies to look at an agent's entire sales activity.
For further information, please contact Beth Hill, Director of the Life, Annuity and Credit Section at beth.hill@tdi.state.tx.us or 512/322-3406. Please contact Dale Barron at dale.barron@tdi.state.tx.us or 512/463-6492 to report fraud.
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Jose Montemayor
Commissioner of Insurance