Can a plan purchase an insurance policy on a totally unrelated 3rd party?

[Earl]

For example, as a viatical settlement.

When the insured dies would the money just go into the Trust and then be investment gain, taxed as ordinary income when distributed?

[JAY21]

I believe you are correct Earl. Assuming for the moment that it's a prudent investment and all the asset diversification issues are otherwise met, I believe this can be done and has the result you indicated. I suppose this could cause some fairly large gains to the trust, which under a DB plan would impact contributions, but that may not be a bad thing depending on plan's funded status (e.g., if it doesn't over fund the plan) and client's funding objectives.

[Earl]

Thanks.

Seeing that this is a single person DC plan I think most of the issues go away and it could be a good investment..... As long as the person actually cooperates and dies in a timely manner.

[Kirk Maldonado]

I think that there is an issue as to whether the plan has an "insurable interest" under state law in the employee so that the plan can even procure the policy on the individual.

[Earl]

I asked the carrier about that and was told that "insurable interest" is in question when the policy is issued. Subsequently, it can be sold and the carrier "doesn't care".

And the insured is not an employee. The person is totally unrelated to the employer or any employees of the employer.

[Blinky the 3-eyed Fish]

If it hasn't been thought of, I would like to point out that if the plan is to murder this individual, then that could raise some legal issues, possibly.

[WDIK]

Related thread.

[four01kman]

Now, now, Blinky. How can a Plan possibly commit murder? I thought only "real" people can do that.

[Kirk Maldonado]

four01kman is right: "Plans don't kill people; people kill people."

[Blinky the 3-eyed Fish]

From now on I will replace the word "plan" with "scheme" when discussing murder. I just hope it doesn't creep into my work-life, because then I will be doing proposals for a Defined Benefit Scheme. I think potential clients will be skeptical with that expression.

[Kirk Maldonado]

Blinky:

Having worked on some limited amounts of international work, I've learned that (at least some types of) employee benefit plans in England are referred to as "schemes."

[mbozek]

Mutual benefits corp states that purchasers of viatical settlements become direct beneficaries and that settlements may be eligible for IRAs, Keoghs and other pension plans. (800-896-7990). The viatical purchaser pays money up front to the insured to become the owner of the policy and is the beneficary of the proceeds when the insured dies. Under state law a life ins policy is a contract which is assignable by its owner. Of course the risk assumed by the purchaser is that the insured will live longer than expected at the time the contract is purchased which will reduce the investment return because additional premiums will have to paid to the ins. co.

[Belgarath]

I'm relatively uninformed on the viatical settlement issues, but it seems like I recall that in some states, anyway, only state licensed viatical settlement companies can purchase policies on folks in which there is no insurable interest? Wouldn't this, in general, preclude a plan from even being allowed to purchase a policy on an unrelated person in the first place?

On a personal level, I do find I have a hard time maintaining my objectivity on this issue. Cold hard logic says an investment is an investment, and there's no reason a plan shouldn't be able to "profit" from someone's untimely demise when another entity (a viatical company) can do the same. But the more human part of me finds it rather disgusting, particularly when you are looking at purchasing one policy on one individual. Obviously the Trustee has reason to believe that this particular individual is going to die early, so it will be a "good" investment. I know it isn't logical, or even necessarily reasonable - just doesn't seem right! But then, I'm a Red Sox fan, so logic obviously isn't a strength of mine...

[Lame Duck]

I believe the term "Defined Benefit Scheme" may be apropos in the 412(i) market.

[jevd]

MBC is now in receivers hands!

[Earl]

Belgarath - I think Muslims would say the same thing about earning interest in a savings account. So I guess it is a matter of perspective. Besides, the guy might actually enjoy the money... as opposed to paying it all in terminal medical bills. Now that would be distasteful.

[mbozek]

Thats interesting- I received their brochure for viatical purchase a couple of weeks ago. This point up a second risk of purchasing viatical settlements - many of the viatical companies are privately held and are not financially stable. Some insurers will purchase LI from their policyholders for their own account. The regulation of viatical settlements under state insurance laws is to protect the seller of the LI not the investors since the purchasers are buying a security which may be regulated by state securities law, not the SEC. Also there is no guarantee that the purchaser will ever receive the proceeds- insureds have disappeared after receiving the viatical settlement and some policies are issued by foreign insurers which will not pay proceeds to US investors. Investing in viatical settlements is similar to investing retirement plan assets in options- not something individual investors should do.

[Belgarath]

Mbozek - if you are interested, just saw the following re MBC - probably old news for any of you who deal with viatical issues:

On May 3, 2004, the Florida Office of Insurance Regulation issued an Emergency Cease and Desist Order against Mutual Benefits Corporation ("MBC"). That Order, among other things, suspended MBC's Florida viatical settlement provider license. Furthermore, it ordered MBC to immediately cease from acting as a viatical settlement provider in and from Florida.

On May 4, 2004, the United States District Court for the Southern District of Florida issued a Temporary Restraining Order against MBC. The Order also named several individuals and entities as defendants or relief defendants. Those named were Joel Steinger, Leslie Steinger, Peter Lombardi, Viatical Benefactors, LLC, Viatical Services, Inc., Kensington Management, Inc., Rainy Consulting Corp., Twin Groves Consulting, Inc., P.J.L. Consulting, Inc., SKS Consulting, Inc., and Camden Consulting, Inc. Additionally, the Restraining Order freezes the assets of the defendants and relief defendants. Section IV of the Order provides that it applies to anyone transacting any business directly or indirectly related to Mutual Benefits Corporation. To read the Order in its entirety, access the link below.

As a result of the above actions, life insurance agents acting as viatical settlement sales agents for MBC, or for any other entity that offers Viatical Settlement Purchase agreements or investment interests in life insurance policies viaticated by MBC, should IMMEDIATELY CEASE ALL SALES ACTIVITY. Furthermore, sales agents with pending transactions should notify the court appointed Receiver immediately.

The Receiver in the matter is:

Bob Martinez, Esq.

Colson Hicks Eidson

255 Aragon Avenue, Second Floor

Coral Gables, FL 33134

http://www.mbcreceiver.com/

mbcreceiver@gardencitygroup.com

Hotline: 1-877-267-1351

Hotline En Español: 1-877-267-1351

Outside the United States, U.S. international code, then 1-941-906-4699