It’s Your Money…. So Make Sure You Keep It!

Unless you have been living under a rock (excuse the cliché’) you have heard of the JG Wentworth advertisement or some other structure settlement funding’s (aka factoring company) for “cash now” and most importantly that they can get you all the money you are entitled to, some even claim they can get you all the money for your structured settlement. As a fraud analyst for a Fortune 500 insurance company, I see instances of structures settlement fraud, scams and abuse on a near daily basis.

Before we delve deeper lets understand what a structured settlement is. Structures settlements (SS) are typically an annuity that is purchased for a claimant/plaintiff after an award is granted in a tort lawsuit. These lawsuits are often from wrongful death, medical malpractice, workers compensation and even for lottery winnings. Structured settlements are set up to ensure the claimant is compensated for the loss of income generation over a period of time. In most cases it is for the life of the claimant. Structured settlements will typical breakdown to a series of monthly payments (e.g. $1,000.00 a month for life) and then periodic lump sum distributions over many years. This is to ensure the claimant can pay for medical needs that may arise. That is a structured settlement in a nut shell. The possible scams do not lie with the funding of a structured settlement, as they are always setup via the courts and the claimant has legal representation. The scams lie when the structured settlements start to pay out.

Factoring companies (e.g. JG Wentworth, Peachtree and StoneCreek) are the companies that “specialize” in buying your structured settlement in exchange for a lump sum “now.” I put now in quotation marks simply because the advertisement is deceptive. Anyone who knows anything about SS knows that the sale of the SS can take as long as 90 days or more to complete. Factoring company advertisements also use a psychological ploy to tug at SS holder’s sense of entitlement by advertising “get your money now”, “it’s your money”, “don’t wait for your money” and “why wait?”

Here is the first rule one has to understand, selling your payments to a factoring company you will only get a substantially lower amount that the original settlement. This is because you are exchanging future value and interest payments for a larger sum (larger than the monthly payments) today. Factoring companies work off of the discount rate when making lump sums and there are many factors that influence the discount rate offered including: length of the payment steam, periodic versus lump sum payments and how soon the next is due. For example if you are owed $100,000 in 20 years versus the same $100,000 due in 10 years you might be able to get a higher discount rate.

So as an example a SS is to pay you $300,000, in monthly $1,000 payments for 25 years. So let’s say after 5 years you decide to sell the whole payment. You will have received $60,000 of the payment and the current value of the rest is $240,000. A factoring company offers 12% discount rate: $240,000 x 12% = $28,800.00. Most people see this huge lump sum and quickly sign on the dotted line. Unfortunately many are unable to handle such large sums of money and simply run out of funds. Again the above is only an example and your situation may vary.

If you still wish to sell your SS payments then here are some tips to keep you safe and free from being a victim of fraud or identity theft:

  • Only negotiate with reputable companies and be suspicious with over-the-top promises for quick cash.
  • When searching the internet, determine if the website lists a physical address and a phone number. Verify how long the factoring company has been in business and verify the information with your Secretary of State the company operates out of.
  • Verify the company privacy policy, this tells how the company plans to use your personal information; if there is no privacy policy….run!
  • Do not settle on the first offer, make sure to shop around. Get as many offers as you can and compare.
  • Consult with a qualified tax adviser as receiving a lump sum may incur a tax liability.

Furthermore since the sale of a SS has to be approved by the state courts it is important that a seller seek the advice of an attorney or a financial advisor, while a lawyer is typically not required in selling a SS, I advise anyone selling a SS to have a lawyer. In addition I also suggest owners of a SS to set-up a durable Power of Attorney (POA), e.g. a lawyer or financial advisor who can act on your behalf in the case you are incarcerated, become incapacitated or declared incompetent by a court.

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2012 in review

The WordPress.com stats helper monkeys prepared a 2012 annual report for this blog.

Here’s an excerpt:

600 people reached the top of Mt. Everest in 2012. This blog got about 3,200 views in 2012. If every person who reached the top of Mt. Everest viewed this blog, it would have taken 5 years to get that many views.

Click here to see the complete report.

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Long-Term Care Fraud: Stealing from the Coffers of the Elderly

The population of the elderly in the United States is growing due to the aging of the baby boomers and they are living longer due to improvements in health care.  2010 Census Bureau data shows that seniors (those 65 and older), increased by 15.1% to 40.3 million, or 13.1% of the total U.S. population. Life expectancy in the U.S. is at 78.2 years and death rates are at an all-time low (1). Even if the cost of health care were not rising, living longer will still be more expensive than most of us had planned.

Medical care costs can ravage a senior’s nest-egg quickly. According to Genworth Financials 2012 cost of care survey, the national median rates for a nursing home semi-private and private rooms are $200/$222 per day(2). In Virginia alone the annual rates for a nursing home are $72,088/$82,125(3). Long-term care (LTC) insurance can help alleviate the high cost for elder care and it typically provides for services not covered by Medicare or private health insurance.

LTC insurance policies are expensive. Beyond this, anything involving seniors and money will always be ripe for fraud; add to that the complexity of LTC policies and the potential for abuse increases fraud risk significantly. Seniors and their families need to be aware of the scams that are perpetrated within the LTC industry. Here are some examples taken from the Coalition Against Insurance Fraud (4):

  • Selling unsuitable policies. Dishonest agents may try to sell overlapping policies when only one is needed, unnecessarily inflating premiums. Sales pitches will typically prey on seniors’ fears that high medical cost will leave them broke or a burden to family.
  • Churning policies. This scam involves “upgrading to a better policy”. The reality is that the upgraded policy is more expensive and may offer little to no greater benefits.
  • Deceptively watered coverage. To close the sale, the seller may eliminate or reduce vital policy features to make the premium more attractive. You aren’t told, however, that critical benefits (such as inflation protection, reduced medical care, higher deductibles and/or co-pays) are no longer there.
  • Overstating Benefits. Seniors are promised that the policy will cover “all” of the seniors long-term care expenses. For example, many times a policy will lack inflation adjustments for future medical costs. Another example would be overly stringent policy limits and restrictions.
  • Making misstatements on applications. Deliberate misstatements about your current medical condition, age, past medical history or other key information are entered onto the policy application to secure the coverage or lower the premium, putting you at legal risk for providing false information.
  • Selling bogus or phony policies. Be on guard for fake coverage, especially bogus home health care coverage. These schemes are designed to steal premiums and leave the senior without any coverage.

LTC insurance is a great personal finance tool and as with most insurance you hope you won’t need it but you’ll be glad you had it if a need ever arises. Now that you are armed with the facts you can fight back against fraudulent LTC scams, here’s how:

  • Do you need long-term care insurance? Coverage is expensive and the high premiums can drain your income and savings. Consult with a trusted advisor about whether you’re in the right financial bracket for LTC insurance.
  • Ask your agent direct questions.If they cannot provide clear answers, pressure you or are evasive – walk away and don’t apologize for it! Some example questions to ask are:
    • What is the agents experience in selling LTC policies?
    • What insurance companies he or she represents?
    • What services does the plan cover – and not cover?
    • How do I qualify for benefits?
  • Make sure the Insurance company/agent is licensed. Contact your state insurance department to see if the insurance company/agent is licensed in your state. Even if the insurer is licensed, make sure they will be able to pay claims by verifying its financial health. A.M. Best has a list of financial ratings of insurance companies.
  • Price shop policies. Check out policies from different insurance companies before deciding. Avoid buying on price alone. The cheapest policy isn’t always the best value.
  • Avoid duplicate policies. You only need one LTC policy. Avoid sales pitches that say you need more.
  • Know the policy restrictions and benefits.Read the policy and rely on it only. Do not rely on sales pitches. Make sure you understand how to qualify for benefits and ensure you understand what the policy’s benefits are. Don’t sign on the dotted line until you are comfortable with the product and all your questions are answered.
  • Fill out the application accurately. An insurer may deny a claim or cancel a policy if your application is inaccurate – it is also grounds for criminal charges of insurance fraud. Sign and return the application only after you’ve double-checked all information — whether you or the agent fill out the application. If you later find an error, notify the insurer immediately. Make sure you receive your policy. Contact your insurance company within 60 days if you haven’t received your policy.

Last but not least if you discover a scam contact your state insurance department immediately. Have all the pertinent facts ready: names, dates, address, phone numbers and have any documents that support your complaint.

________________

Thomas R Kaiser Sr.is a Certified Identity Theft Risk Management Specialist in the financial services industry in mortgage banking, identity theft, check fraud and insurance.

1. http://www.seniorjournal.com/NEWS/SeniorStats/2011/20110527-NationsPopulationAging.htm
2. http://www.genworth.com/content/etc/medialib/genworth_v2/pdf/ltc_cost_of_care.Par.85518.File.dat/Executive%20Summary_gnw.pdf
3. http://www.genworth.com/content/non_navigable/corporate/about_genworth/industry_expertise/cost_of_care.html
4. http://www.insurancefraud.org/long_term_insurance.htm

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Multi-Level Marketing: Pyramid Scheme or Legit Business Opportunity?

With the prolonged down economy many individuals and families are continuing their search for ways to bring home extra cash to pay bills. If you are not living under a rock, then at some point you have received a phone call from a friend or relative begging you to consider a new business “opportunity.” Enter Multi-Level Marketing (MLM) businesses. These are the programs where participants sell exclusive products and recruit others to do the same; the participants collect product commissions, override commissions from downlines and bonuses for recruiting. Pyramid schemes, much like Ponzi schemes, eventually collapse like a house of cards. By its nature a pyramid scheme will leave those at the bottom levels broke and unable to recoup their initial investments; all the while the top of the pyramid (1-2%) will make the majority of the money. With this in mind, could you tell the difference between a legitimate retail MLM (i.e., Mary Kay) or a bogus recruiting MLM, which is a pyramid scheme in disguise?

First things first, a legal MLM involves being recruited in order to sell a product or service that has some inherent value. As a recruit you make a profit by selling the product or service without the need to recruit others. While you can recruit others to sell with you to increase your profit, it is not required. Under a pyramid MLM (or a “recruiting” MLM), the products have no inherent value and you are required to recruit others in order to make your money back.

Now that you understand the primary difference between a legit MLM and a pyramid MLM, how can you spot the pyramid MLM? Here are some of the most common red flags associated with pyramid MLM schemes:

  • Since the main premise of a pyramid MLM is recruiting, new members are told that there is unlimited recruiting potential.
  • Pyramid MLMs will often have the back story of the rich founder who just wants to help others realize their dream of having their own business and the associated wealth. Let’s face it; no legit business owner is in business to help others get rich, they are in the business to make a profit.
  • There is always a fee to become a licensed distributor. Additionally new recruits are often told they must buy large quantities of the products in order to join the business.
  • The commissions for product sales are lower than bonuses paid for bringing in new recruits.
  • Pyramid MLM are viral and as a consequence extremely predatory. Most pyramid MLM schemes will target minorities, the working poor, and the uneducated and will primarily be concentrated in more rural areas.

In the end, a pyramid MLM scheme will eventually run out of potential recruits and will be doomed to bankrupt itself; leaving you with lost time and lost money. It is important to not allow yourself to be victimized by a pyramid MLM scheme. Here are some tips for avoiding pyramid MLM schemes:

  • Avoid MLM plans that pay commissions for recruiting new distributors.
  • Take your time evaluating the MLM plan before signing up. Don’t buy into the hype that many pyramid MLMs portray. Learn about the company, its products, and product pricing and any upfront costs.
  • Demand the promoter to substantiate their claims with hard facts, if they cannot or refuse, run don’t walk.
  • If the MLM promoters try to reassure you that the MLM is legal or it’s not a pyramid scheme, ask yourself if such statements are necessary for a supposed legit MLM.
  • Watch out for endorsements from government agencies, officials or celebrities. In most cases these endorsements are either false or paid advertisements.

If you are confronted with, or suspect, a pyramid MLM scheme contact your state attorney general’s office and/or you can file a complaint with your state’s Better Business Bureau and the Federal Trade Commission.

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Multi-Level Marketing: Pyramid Scheme or Legit Business Opportunity?

With the prolonged down economy many individuals and families are continuing their search for ways to bring home extra cash to pay bills. If you are not living under a rock, then at some point you have received a phone call from a friend or relative begging you to consider a new business “opportunity.” Enter Multi-Level Marketing (MLM) businesses. These are the programs where participants sell exclusive products and recruit others to do the same; the participants collect product commissions, override commissions from downlines and bonuses for recruiting. Pyramid schemes, much like Ponzi schemes, eventually collapse like a house of cards. By its nature a pyramid scheme will leave those at the bottom levels broke and unable to recoup their initial investments; all the while the top of the pyramid (1-2%) will make the majority of the money. With this in mind, could you tell the difference between a legitimate retail MLM (i.e., Mary Kay) or a bogus recruiting MLM, which is a pyramid scheme in disguise?

First things first, a legal MLM involves being recruited in order to sell a product or service that has some inherent value. As a recruit you make a profit by selling the product or service without the need to recruit others. While you can recruit others to sell with you to increase your profit, it is not required. Under a pyramid MLM (or a “recruiting” MLM), the products have no inherent value and you are required to recruit others in order to make your money back.

Now that you understand the primary difference between a legit MLM and a pyramid MLM, how can you spot the pyramid MLM? Here are some of the most common red flags associated with pyramid MLM schemes:

  • Since the main premise of a pyramid MLM is recruiting, new members are told that there is unlimited recruiting potential.
  • Pyramid MLMs will often have the back story of the rich founder who just wants to help others realize their dream of having their own business and the associated wealth. Let’s face it; no legit business owner is in business to help others get rich, they are in the business to make a profit.
  • There is always a fee to become a licensed distributor. Additionally new recruits are often told they must buy large quantities of the products in order to join the business.
  • The commissions for product sales are lower than bonuses paid for bringing in new recruits.
  • Pyramid MLM are viral and as a consequence extremely predatory. Most pyramid MLM schemes will target minorities, the working poor, and the uneducated and will primarily be concentrated in more rural areas.

In the end, a pyramid MLM scheme will eventually run out of potential recruits and will be doomed to bankrupt itself; leaving you with lost time and lost money. It is important to not allow yourself to be victimized by a pyramid MLM scheme. Here are some tips for avoiding pyramid MLM schemes:

  • Avoid MLM plans that pay commissions for recruiting new distributors.
  • Take your time evaluating the MLM plan before signing up. Don’t buy into the hype that many pyramid MLMs portray. Learn about the company, its products, and product pricing and any upfront costs.
  • Demand the promoter to substantiate their claims with hard facts, if they cannot or refuse, run don’t walk.
  • If the MLM promoters try to reassure you that the MLM is legal or it’s not a pyramid scheme, ask yourself if such statements are necessary for a supposed legit MLM.
  • Watch out for endorsements from government agencies, officials or celebrities. In most cases these endorsements are either false or paid advertisements.

If you are confronted with, or suspect, a pyramid MLM scheme contact your state attorney general’s office and/or you can file a complaint with your state’s Better Business Bureau and the Federal Trade Commission.

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Elder Abuse: The Story Behind Stranger-Owned Life Insurance (STOLI)

Stop me if you’ve heard this one before. An elderly couple is invited to a fancy dinner by a life insurance agent. After an evening of good food, drink and conversation, the agent tells the elderly couple about an investment opportunity that will net the elderly couple a nice tidy sum of cash. All they have to do is take out a life insurance policy for a large sum of money, say $10 million. The agent promises to loan the couple the money to pay the premiums and will even give the elderly couple a hefty cash reward for doing so, as long as they agree to change the agent to the beneficiary at a later time. What decision should this elderly couple make?

Is this some kind of new investment scam, directed at seniors? In some respects, yes (as I will discuss later). The type of insurance policy depicted by the opening story is known in the insurance industry as “stranger owner life insurance” or STOLI for short. STOLI is simply life insurance that is purchased with the intent of transferring ownership to a third party (typically a group of investors), who has no insurable interest in the person(s) being insured. So what’s the big deal you might ask yourself?

While insurance laws differ across all 50 states, one thing that is constant is insurable interest. Insurable interest only exists when the owner of the life insurance policy is closely related (e.g. spouse) to the insured, or otherwise has a financial interest in the continued life of the insured. Simply put, no one can take out a life insurance policy on a perfect stranger. So, if no insurable interest exists then the insurer can declare a policy void. However promoters have found a clever trick around this issue.

All life insurance policies have what’s called a contestability period, usually two years, at the beginning of a policy being issued. In essence if an insured dies within the contestability period the insurer can deny the claim if they find that the insured made a false material misrepresentation. After a policy has cleared the incontestability period the policy becomes incontestable and the insurer has to payout the death benefit no matter the circumstances.

In a typical STOLI “transaction” a promoter or life insurance agent will recruit an elderly couple to take out a life policy and name themselves the beneficiaries. After the elderly couple has owned the policy through the contestability period, they then change the beneficiaries of the policy to the investor, when the insurance company usually cannot do anything about a stranger owning the life policy.

So at the heart of a STOLI policy is the intent to fool the issuing insurance company and eventually provide the investors with big payout. (With no interest in “the continued life of the insured”, it’s gambling with a person’s life; in a worst case scenario, what’s to keep someone from getting impatient and arranging for a premature payout – catch my drift?).

For the elderly the risks can be substantial, here are a few examples:

  • Possible liability on the senior or his/her estate. If the insurer finds the policy lacked insurable interest; the insurer can void the policy. In this scenario the investors could then sue the senior or their estate for damages.
  • Possible loss of ability to purchase additional life insurance. Everyone has a finite amount of insurance capacity on their life. Insurers will often decline to issue additional life insurance if there is substantial insurance in place on the senior’s life. Thus the senior could be denied life insurance should a legitimate need arise.
  • Possible tax consequences. STOLI transactions do not enjoy the same tax-free benefits as legitimate life insurance proceeds. Furthermore the senior could owe taxes on the interest free portion of their loan they were given to pay the 2 years’ worth of premiums and the cash bonus they were paid for allowing the STOLI to be taken out on their life.
  • Possible loss of medical privacy. Once a stranger owns a life policy on a senior; they are going to want to check in on the status of their investment. Once a senior enters into a STOLI the investors will contact them often to inquire about their health.

So how does a senior or elderly couple protect themselves from entering into a STOLI contract?

  • Steer clear of schemes involving the purchase of life insurance to be transferred to 3rd party investors.
  • Secure the advice of an independent and trusted professional (e.g. a lawyer or financial advisor); you’ll want the independent advisor to fully explore if an insurable interest exists.
  • Never agree to give up private and confidential medical information.
  • As with any application for insurance, never misrepresent your information as this could lead to a fraud prosecution and subject the senior to civil and criminal penalties.
  • Obtain a copy of the policy for which you are applying.
  • Contact your state’s Department of Insurance if you suspect you have entered into a STOLI. You can find your states Department of Insurance by clicking on the National Association of Insurance Commissioners (NAIC) website and click on your state.

In the end, our elder couple, who has been reading articles from FraudAvengers, recognizes it doesn’t sound right, declines the agent’s STOLI offer, politely thanks the agent for the wonderful dinner and leaves the restaurant.

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Natural Disasters: A Breeding Grounds for Contractor Frauds

The tally for natural disaster losses in 2011 are in and the results are not pretty. According to USA Today [1] the U.S. was hit with 12 – 14 separate weather and climate disasters, each of which caused a minimum of $1 billion in damages. The approximate price tag for these natural disasters alone exceeds $50 billion. The resulting tornados, flooding and severe thunderstorms all mean one thing for insurers and consumers; homes will need to be repaired. In addition there will be claims to file and contractors to hire to perform the repair work. For many homeowners the warning is out, deal with only proven contractors and avoid the door-to-door con artists that prey upon stressed out homeowners.

According to the International Association of Special Investigative Units (IASIU) [2] phony contractors are a big problem after natural disasters. Many swindlers are locally based, however often times they’re unlicensed out-of-state con artists who go door to door. These supposed contractors will often perform little to no work or perform work with shoddy materials and in some cases cause more damage to homes in order to inflate their fees. In any event homeowners need to be aware that many homeowners’ insurance policies typically will not cover fraudulent repairs, leaving the owner with repair bills and costly shoddy work that must be redone at their own expense.

As a homeowner you must be vigilant when hiring a contractor for home repairs. Here are some red flags that homeowners should be wary of regarding scam contractors:

  • Be suspicious of contractors offering repairs at low costs but demand payment in full upfront. Often time these contractors will scam several people then blow town with the money.
  • Contractors driving unmarked vehicles or vehicles with out of state plates
  • Contractors without a physical address
  • Contractors that use high-pressure sales tactics
  • Contractors that refuse to show an identification card
  • Urge you to borrow money for repairs, then steer you to a specific lender or they may try to act as an intermediary
  • Asks you to sign paperwork that you have not had time to review
  • Wants personal financial information before starting any repairs

If you are a homeowner and you need repairs done to your home after a natural disaster here are some tips to protect yourself from fraud by nefarious contractors:

  • Ask your insurance company for established contractors
  • Have your insurer inspect the damage before repairs commence
  • Always pay by check, so that you have a record of the transaction and you will be able to initiate a stop payment in the event the contractor is a con-artist or does shoddy work.
  • Deal only with licensed and bonded contractors. You can check here for information regarding the contractor’s license for your particular state.
  • Insist on a signed contract before work begins
  • Always read any documents before signing them, if you don’t understand any of the terms, ask for clarification
  • Never, ever give any personal information (e.g., your SSN, any credit card passwords or, bank account information)
  • Get at a minimum two repair estimates
  •  You shouldn’t expect to pay more than 20% upfront, and don’t make a full payment until the terms of the contract are met

As always if you believe you are a victim of a contractor scam, contact local law enforcement, report the scam to your state Attorney General’s office and file a complaint with the Federal Trade Commission. Furthermore you can also report fraud to the National Disaster Fraud Hotline by calling toll free at (866)720-5721 or at disaster@leo.gov.

 

[1] Rice, Doyle (2011). USA slammed by 12 disasters that each cost at least $1B. USA Today. Retrieved from: http://www.usatoday.com/weather/news/story/2011-12-07/billion-dollar-disasters/51704362/1

[2] Coalition Against Insurance Fraud. Irene’s Stormy Aftermath: Seven Ways To Save Your Home From Crooked Contractors. Retrieved from: http://insurancefraud.org/newsRelease.lasso?recid=3098

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