Survivor benefits are as certain as death and taxes—when the insured has AIDS.
WACO’S BRIAN PARDO has given a lot of thought to being on what he calls “the leading edge.” The fifty-year-old entrepreneur has recently started a business, Life Partners, that some people see as pushing the limits way too far: Pardo represents clients who want to buy life insurance policies held by terminally ill people, mostly people with AIDS. “I have been accused of speculating in death,” he says, “but there is no speculation to this. These people are terminally ill and are going to die. All we are trying to do is provide them with financial assistance.
Buying up insurance benefits is nothing new, although in the past it hasn’t been common. The practice, usually arranged privately among family members, has been around since the beginning of the insurance industry three hundred years ago. The AIDS epidemic has mad it common. With more than seventy licensed offices all over the country, Life Partners, founded in 1991, is the largest company specializing in this new market. But it is the kind of business that makes people uneasy, and Pardo is the focus of a controversy over the morality and legality of this enterprise.
Pardo doesn’t advertise—although companies similar to his place ads in gay-oriented publications. He says that all of his clients arrange to sell their policies through their lawyers or financial planners. “At this point the AIDS victims are desperate,” says Pardo. “Their income has stopped, their health insurance has run out, and they can’t make their house payments, much less the monthly premium on their life insurance policy.” Pardo helps solve all those problems. For a 3 to 5 percent fee, Pardo explains, his company acts as a clearinghouse for buyers, who purchase the policy for 80 to 85 percent of its face value in exchange for being named the policy owner. The seller is responsible for legal fees and closing costs, so the seller ends up with 65 to 70 percent of the policy’s coverage value. Once the transaction is completed, the money is wired into the seller’s bank account. The new owner collects at 100 percent when the seller dies. Says Pardo: “It’s a win-win situation for everybody.” Pardo’s clients seem to agree. The companion of one AIDS victim who sold his policy to Life Partners in June says, “There is a definite need for it—it gave my friend peace of mind.
Pardo’s modest suite is on a street lined with insurance companies and industrial offices. On his desk is a photo of Pardo and President Jimmy Carter taken in the White House Cabinet Room when Pardo served on Carter’s ad hoc committee on alternative energy. Behind the desk hang pictures of Pardo’s two daughters and an autographed photo of Ronald Reagan. In vigorous middle age, Pardo hardly looks like a scavenger profiting from the misfortunes of the terminally ill, as some have painted him.
North Dakota securities commissioner Glenn Pomeroy labeled Life Partners “ghoulish, insensitive…and flat-out illegal” and called a press conference at Washingon’s National Press Club last August to say so. Pomeroy learned about Life Partners from a letter that one of Pardo’s licensees in Florida had written to a friend in North Dakota in which the licensee claimed that one can “make big bucks” buying policies. Pardo agrees that the remarks were unfortunate. “They were also true,” he says. Pomeroy heard about the letter and hastily issued a cease and desist order to prevent Pardo from conducting business in North Dakota. Pardo is countersuing Pomeroy and the North American Securities Administrators Association for slander and libel.
But the bad publicity hasn’t kept clients away. Says one Waco investor: “It’s hard to resist an opportunity to do some good and get a superior return on your investment too.” And with certificates of deposit offering 2.5 percent, the return on a Life Parners investment is appealing—25 percent or more in a year is possible. There are risks, Pardo warns. A cure for AIDS could be discovered, or the patient could live longer than 24 months. And the potential for legal entanglements is great. Although this burgeoning industry is not yet regulated, legislation is being discussed that would require licenses both for individuals who sell their own policies and for clients who buy the policies. Other regulations would establish prices and rates of return. But as with any other investment, obvious variables—in this case, the patient’s health and life expectancy—are meticulously calculated.
Confidential medical histories of people with AIDS are stacked on Pardo’s desk: A form details the medical deterioration of the patients whose insurance policies are for sale. “We don’t buy anyone’s policy until they have a diagnosis of full-blown AIDS,” says Pardo. “We know then that they have at the most twenty-four months to live—it is a death certificate.” To an investor, the opportunistic diseases gnawing away at these patients are factors in the decision whether to buy. On one form Pardo shows me that the patient, whose name is in code, has suffered from thrush, cytomegalovirus, herpes, and a litany of other devastating ills. A policy similar to this one was recently published by a Waco businessman, who sees his choice as “relatively secure because of the predictable, short time frame.”
With 350,000 cases of AIDS, 1 million to 2 million HIV cases, and $10 billion worth of life insurance policies on victims of the disease, Pardo expected his business to have a lucrative but limited future. Many AIDS victims have bough life insurance before 1985, when AIDS was officially identified as a disease. Now blood tests are required for policies of more than $1000,000—but not for smaller policies, and many are still being purchased.
Pardo says, “The insurance companies are very much against what I am doing. They know that these people will let the policies lapse. Then the insurance companies don’t have to pay anything.” Insurance companies deny this allegation. Rafael Ayuso, the spokesperson for the Texas Department of Insurance, calls the legality of third-party buyouts “highly questionable,” in part because buyouts of insurance policies are unregulated and unlicensed in Texas. Bob Blevins, executive directory of the Texas Life Insurance Association, sees the emotional side of the problem: “Judging how long somebody is going to live in order to get them to free a policy makes me very nervous.”
Blevins and insurance agents think their way is better. About two hundred companies now offer all of their terminally ill clients the opportunity to receive a portion of their death benefits in advance. Him Longo, a public relations manager for Prudential Insurance Company of America, says, “What’s the difference if we pay off a few months ahead of time?” But, Pardo points out, the time left to patients is less than six months for Prudential customers. “By that time,” says Pardo, “patients are on their deathbeds.”
A 43-year-old AIDS sufferer, who hopes to live another two years at least, says, “The people who buy policies won’t touch you if you are expected to live more than eighteen months. And some of the companies can be brutal. It’s cold, cold as ice.” He has contacted five companies, including Life Partners, and says some of the offers he received were as low as 57-percent of the face value of his policy. Others were able to quote down to the penny the amount they could give him: $76,728.24 on his $100,000 policy if he had a six-months’ life expectancy, lower if his life expectancy was longer. But cashing in the policy has not been like winning a jackpot. “This has not been fun,” he says. “This is a business deal. I am selling to the highest bidder.”