Investors Using Variable Annuities as an Investment Under Attack

The Wall Street Journal reports that some investors are using variable annuities issued by insurance companies as an investment tool.  This is how the investment scheme works: 

• The investor pays a terminally-ill patient a small sum in exchange for a variable annuity on the terminally-ill patient’s life.  
• The the insurance company invests the annuity money in the stock market.  
• The insurance company guarantees that, at the least, the amount invested will be returned.
• When the terminally ill patient dies, the investor will get at least as much as was invested and possibly more if the stock market experienced any growth. 

One federal case pending in New York alleges that investors fraudulently took out variable annuities on a quadriplegic woman, pointing to signatures that the woman could not have executed because her dominant arm had been amputated.

An estate planning attorney in Rhode Island who advertised for terminally ill patients in a Catholic publication, posing as a compassionate organization that gives financial assistance to those near death, has been accused of misleading “beneficiaries” into a variable annuity investment scheme. The attorney claims that he mislead no one and that insurance companies stirred up investigations and lawsuits after they lost money on variable annuities he purchased before the stock market dropped in 2008.  

Some say these variable annuity cases will present issues of first impression:

[Insurance companies maintain] that the annuities are void because they violated a state “insurable interest” law that requires anybody buying life insurance to have a legitimate interest in the life of the insured, and because the defendants failed to disclose the terminal illnesses.

[Defense lawyers] respond that the annuities are securities and don’t fall under those laws, and that insurers didn’t ask about health for fear of reducing the pool of buyers.

Legal experts say the Rhode Island cases may be the first to test the nuances of variable-annuity death benefits.

Mark Maremont & Leslie Scism, Investors Recruit Terminally Ill to Outwit Insurers on Annuities, WSJ, Feb. 16, 2010.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this to my attention.