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Death Takes a Policy: We Answer Questions From Readers

Joseph Caramadre made a profit dealing in insurance products that paid out when someone died. Prosecutors charged him with identity theft and fraud, but Caramadre said he just used a legal loophole. His story moved dozens of ProPublica readers to debate the ethics of insurance and corporate behavior.

Readers reacted strongly — and thoughtfully — to our story about how a Rhode Island man recruited terminally ill people so he could cash in on lucrative annuity contracts offered by life insurance companies.

A few scorned Joseph Caramadre, now facing a 66-count criminal indictment, for what they saw as his exploitation of the terminally ill. Most saved their ire for the insurance companies and took less moral offense at Caramadre, noting that the dying participants received money, even if it was much less than Caramadre and his investors made.

Readers also raised some good questions; here are our answers. We will update as we get more.

How is this different from "Dead Peasant” insurance policies? via Dean Muller

So-called "dead-peasant” policies, or corporate-owned life insurance policies (COLI), involve companies taking out life insurance on their employees. This practice landed a number of companies in court a few years ago when employees complained that they didn't know what their employer was doing. More recently, Louisiana's legislature considered allowing the state retirement system to take out life insurance on state employees — as a way to reduce pension debt. The bill appears to have been dropped.

Regular life insurance covers an individual and is paid out when that person dies. Caramadre worked with variable annuities, which are different than life insurance. There are three players in a variable annuity contract: an investor, a beneficiary and someone called an annuitant. The annuitant acts as a "measuring life,” whose death triggers a payout — either the return of an original investment or the value of the investment account, whichever was greater — to the beneficiary. In Caramadre's case, the investor and the beneficiary were one and the same.

One potential similarity to the dead peasant policies involves the allegations made by prosecutors against Caramadre. They maintain that the terminally ill annuitants whose deaths triggered the payouts did not fully understand Caramadre's scheme or their role in it.

How did investors other than Caramadre make money on the scheme? via Justin Burke

There were two ways to profit. Caramadre's investors would put money into a variable annuity, which would then be invested in one of the funds offered by the insurance company. If the fund's value rose, so would the investment. Potentially it could grow to be worth more than the death benefit. But many of the companies also offered death benefit sweeteners, such as bonuses or ratchets. These could make the death benefit worth more than the original investment. For example, if the company offered a 6 percent bonus, investors who put in $1 million would automatically have $60,000 added to the death benefit. When the annuitant died, if the death benefit was greater than the amount of the investment account, the investor would pocket the bonus.

What exactly do prosecutors allege was illegal about this? via Chris

The indictment asserts that Caramadre and his associates obtained the identity information of terminally ill people without their knowledge or consent through misrepresentations and in some cases forgery. They then used this identity information to obtain millions of dollars from insurance companies and bond issuers. The indictment does not allege that the terminally ill people were defrauded of any money themselves. Rather, their identity information was misappropriated so that Caramadre and his associated could profit from their deaths.

Where did Caramadre come up with the $2,000 figure? via Zach

I don't know how Caramadre arrived at $2,000 for the initial payment. In an effort to identify people with terminal illnesses, Caramadre in 2008 advertised that he would give $2,000 to every dying person who contacted him whether or not they agreed to become an annuitant. According to court records, more than 150 received the $2,000. If they wished to participate, they received even more money, typically between $3,000 and $10,000 depending in part on how many contracts they did.

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