Ethics Framework Application
Your paper should be typed, double-spaced and one to three pages long. You can submit your paper here through the assignments tab.
Your assignment is as follows:
Read the Summary posted here Death Takes a Policy. Provide a summary of what happened in Mr. Caramadre’s situation. Second, put yourself in the place of Caramadre and discuss how you would act under similar circumstances. In your answer, you must apply a Framework for Ethical Decision Making . Although not required, you might want to listen to the audio posted here (“Loopholes- Death Takes a Policy”) which provides an excellent narratibe of the case. To make the audio a little shorter, you can fast forward it to12:50.
Death Takes a Policy
That was the promise of an advertisement that appeared regularly in 2007 and 2008 in the Rhode Island Catholic, the official newspaper of the local diocese. The money, the ad said, was coming from a “compassionate organization” that wanted to provide “financial assistance” for those near death.
In reality, the ad was a recruiting pitch for a plan by a prominent Rhode Island estate-planning lawyer, who believed he had discovered a way to use an investment product sold by insurance companies to make no-risk bets on the stock market. He recruited dozens of terminally ill people to, in effect, serve as paid fronts for purchases variable annuities. The lawyer and other investors put tens of millions of dollars into the policies, hoping to reap a profit when the recruits died.
Variable annuities are issued through insurance carriers, but function as retirement-savings vehicles similar to 401(k) plans. An individual puts in money upfront and can add more over time, which gets invested in stock or bond funds and grows tax-deferred.
At retirement, a holder can withdraw the money, convert the accumulated amount into a stream of lifetime annual payments—or leave it sitting there for heirs.
The twist that makes variable annuities attractive to professional investors is a money-back guarantee built into the plans, called a death benefit. In effect, insurers promise that a buyer’s beneficiaries will get back at least the amount that was originally invested, less withdrawals. So if a holder puts in $1 million, and the market subsequently tanks, the holder’s heirs will still receive $1 million.
Some insurers added enhancements to this basic death benefit, including a built-in interest rate that gradually increases the minimum money-back amount. Insurers figured they could recoup the cost of the guarantees over time, through the hefty fees usually associated with the products.
In the case of ING’s Golden Select Premium Plus variable annuity, the company promised to add 5 percent of the value of the contract. So, if you deposited a million dollars, the insurance company would add $50,000 on top of it.
Why would ING give away free money?
It never expected to pay the majority of the benefits it offered.
The 5 percent was added to the death benefit, which was held in a separate account known as a shadow account. The insurance company only paid the shadow account if the policyholder died and the money — the million dollars — in the real account had shrunk to a lesser value.
The companies’ models of customer behavior, which were based on data collected before the 2008 financial collapse, predicted that the death benefit would rarely be paid. Something would happen. Policymakers would take the money out for a big purchase, surrendering their account. If the policyholder annuitized — started taking a stream of monthly payments — the shadow account disappeared. In any event, the rising market made it likely that the account would outperform the promises.
Perhaps the gaudiest of the benefits the companies never expected to pay was known as the “rachet.” The idea was perfect for a steadily rising market. Say you had $1 million in your account in 2007 and your investment did well, boosting the value to $1.2 million. That amount would be set on a given date as your death benefit which you would be paid no matter what had happened to your investment. If stocks cratered, as they did in 2008, and your account fell to, say, $600,000? The insurance company would still owe you $1.2 million when you died.
Joseph A. Caramadre, the Cranston, R.I., lawyer behind the ads recruiting the terminally ill, is an insurance expert with a high profile for his philanthropic activities. Last year, his family was honored by the Rhode Island United Way chapter with its highest annual award, and was lauded by the local Catholic Charity Fund for a $100,000 gift.
Variable annuities have two significant differences from regular life insurance. Because the products are sold primarily as investments, insurers generally don’t ask about the health of the “annuitant,” the person whose death triggers the death benefit. And some don’t seek information about the buyer’s relationship to this annuitant.
The best way to take advantage of the death benefit, Mr. Caramadre decided, was to take out an annuity tied to somebody with a short time to live, his lawyer says. That transformed a long-term product with hefty fees into a short-term, no-lose way to play the stock market.
If stocks rose while the person was still alive, the investor did well. If they fell, the investor got a full refund, leaving the insurer on the hook for the loss. Meanwhile, a broker—in some cases a partner in Mr. Caramadre’s firm—would collect a share of a commission of as much as 7.5% of the invested amount, paid by the insurer.
Mr. Caramadre started off by teaming clients with terminally ill people found by word of mouth, his lawyer says, and also invested his own money. Profits could be small. But in one instance, an investor made a 30% profit in nine months on a $1 million annuity, according to one of eight lawsuits filed by insurers in federal court in Rhode Island seeking to rescind some of the annuity deals.
Among those who responded to Mr. Caramadre’s offer was Sandra Bulpitt of Johnston, R.I. She was dying of stomach cancer in 2008 when she saw a flier from what appeared to be a Catholic charity, says her husband, Dan. Mr. Bulpitt says the family of four was on food stamps after he quit his auto-dealership job to care for his wife.
One of Mr. Caramadre’s employees came to their house and gave them $1,000, Mr. Bulpitt recalls. In a second meeting, the man brought a client who paid them $5,000 “as philanthropy” for helping with what Mr. Bulpitt thought was a tax shelter. His wife, heavily medicated, signed a flurry of papers.
According to a lawsuit brought by Aegon NV, one of its units issued an annuity in Ms. Bulpitt’s name in October 2008, and a total of $1 million was soon put into it. Ms. Bulpitt died less than four months later, at age 49, as the stock market was approaching its low. When the Caramadre employee submitted a death-benefit claim in June 2009, the account was less than the original $1 million, according to a spokesman for Mr. Caramadre. But Aegon repaid the full $1 million, plus $13,000 from an interest rate built into the death benefit.
Mr. Bulpitt, who says he recently testified before a federal grand jury, says his wife wasn’t told about any annuity. He says “they took advantage of my wife. Don’t get me wrong, I was out of work. The money was definitely needed.” Still, “I think they’re scumbags for preying on the sick and suffering like that.”
Mr. Flanders says everyone who signed up for annuities was fully informed. “This was the opposite of Bernie Madoff,” he says. “Everybody who was touched by Mr. Caramadre made money.” He says Mr. Bulpitt got an additional $2,000 after requesting more help.
His lawyer, Mr. Flanders, says his client genuinely wanted to help the terminally ill. More than 150 people responded to the offer, he says. Of those, 112 weren’t interested in having their names used for an investment plan and were paid $2,000 anyway, he says.
Mr. Caramadre offered extra money to those who let him use their names in connection with the annuity plan
Anthony Pitocco, a 74-year-old man with lung cancer, is listed on a $2 million annuity taken out in January 2009. In a sworn statement filed in an Aegon Insurance Company lawsuit, he said the signature on the annuity application wasn’t his. His son, Jim, says: “Why should people be profiting from my dad dying? That’s just disgraceful.”
Mr. Flanders says there may be a few angry people, but many who received the money were happy to participate. “Far from being taken advantage of, they were being given an opportunity to make money.” He insists that Mr. Pitocco signed the documents, and notes that he was given an extra $3,000 in cash.