Did this guy steal from insurance
companies or exploit their loopholes?
Joseph Caramadre is a lawyer and financial planner who likes to read the fine print. Now he's being attacked by both the insurance companies and the FBI.
It used to be that insurance companies wanted the buyer of a policy to have an "insurable interest" if they bought a policy for someone else. The insured should have a relationship with the buyer, such as a relative or a spouse, for instance.
When Mr. Caramadre saw that insurance companies were selling something called a variable annuity that would let you invest your money and pay even more if you died, he read the fine print and wondered: what if you didn't need to have a relationship with the dying person to collect the money?
Insurable interest worked fine for 200 years or so until the life insurance business itself changed. Despite its name, the industry doesn't sell as much "life insurance" anymore. Life companies now peddle financial services, particularly annuities. Variable annuities were developed in the 1950s, initially as a way to give teachers retirement options. Insurable interest was not an issue and could have been an impediment to widespread adoption of the product...Read the article: Death Takes a Policy: How a Lawyer Exploited the Fine Print and Found Himself Facing Federal Charges, ProPublica>>
As imagined by the insurance companies, variable annuities have two participants. There's the investor, the person who puts up the money. That person typically also serves as the annuitant, or the "measuring life." If that person dies, the death benefit is paid to the beneficiary, usually a spouse or child.
Caramadre realized it didn't have to be that way. There was no requirement that the investor and the annuitant be the same person. In fact, as he read the contracts, the annuitant didn't need to have a relationship with the investor at all. Caramadre or one of his clients could buy an annuity on the life of someone who was not expected to live long and then pocket any profit when that person died.
"All we need to do is replace the necessity of the investor having to die, with someone else, dying," says Caramadre.
If they chose well, the account went up and they reaped the benefits. If they chose poorly, the death benefit kicked in and they recouped their original investment.
"If you won, you keep the winnings. If you lose, they give you your money back," says Caramadre.
Prefer to listen? Here's an audio version of his story: Loopholes, from This American life>>