Madoff’s Investors Sell Life Insurance, Property as They Struggle to Raise Cash

Posted December 20, 2008

Many wealthy investors are experiencing stunning reversal of fortunes brought on the biggest Ponzi scheme in history that Bernard Madoff is accused of masterminding. Many of these individual investors did not have a direct account with his firm Bernard L. Madoff Investment Securities (BMIS) but were exposed through hedge funds set up by outside investment advisory firms. Firms such as Fairfield Greenwich Advisors, Tremont Group Holdings, Ascot Partners, and Access International Advisors were among those that sustained the biggest losses.

Some of the wealthiest socialites in America woke up bankrupt the day after Madoff was arrested, forcing some of them to put homes up for auction as they scrambled for cash.  A pawnshop in Palm Beach noted that more affluent people are hocking expensive wristwatches, gold pendants, diamond-studded Stars of David and other jewelry as collateral for 60-day loans, The Associated Press reported.

Experts also predict the scandal will force many of the newly bankrupt to sell their life insurance policies originally purchased for estate tax planning.  Individuals with considerable estate typically use life insurance in conjunction with other types of trusts to cover estate tax or other significant expenses.

The level of the death benefit of the life insurance policy depends on the value of the estate but it typically starts at $1 million.  Depending on the policy owner’s age, health and other factors a life insurance with a death benefit of $5 million could fetch anywhere from $250,000 to $1.5 million in life settlement transactions. Although it is considered as a last resort for many, selling their life insurance has become the only way out for others. 

Things are tougher for the less wealthy. Various reports said retirement assets of many ordinary investors – from $40,000 to entire nest eggs worth more than $1 million – vanished when BMIS collapsed.

Many of them are hoping for a bailout from the Securities Investor Protection Corporation (SIPC), an industry-funded organization set up by the government to protect investors from fraud.

However, each investor is only entitled to a maximum payout of $500,000 if a claim is approved and many experts doubt that SIPC has enough money to pay out all the claims, according to The Associated Press. SIPC said it can access a $1 billion line of credit plus a $1 billion injection from the Treasury Department to fortify its current reserve of $1.6 billion. In theory, the total funds can sufficiently provide the maximum amount to only about 7,000 customers.

Making the situation even worse for these investors is that the claims process typically takes years to complete. Due to the fact that Madoff’s records are believed to be fraudulent and unreliable, SIPC is struggling to determine how much assets BMIS actually owns and what the size of the claims are. In fact, the official count of Madoff’s customers has not been established yet.

It is not going to happen fast enough to get the relief that they need and people are turning to assets they can liquidate, such as a home, jewelry or life insurance.

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