The Sticky Business of Life Settlements
Policies are “banking on another person’s early demise”
Potential for Fraud
“Unfortunately, many seniors may not fully appreciate the implications
of selling their life insurance policy to someone who is purchasing it
for investment purposes,” said the SEC’s Shapiro. “For instance, it is
possible that seniors may lose the ability to obtain life insurance in
the future, that they may lose certain tax benefits, and that they may
find that certain personal information about their health is being
shared with or monitored by strangers. On the other side of the
transaction, investors may not have a complete understanding of the
investment risks associated with a life settlement policy, including
the risks related to the health and life expectancy of the insured.”
The potential for fraud lies in several places. Are people being
persuaded to sell their policies? How do individual policyholders know
they’re getting a fair deal (price)? How many of these settlements are
done within five years of the policy being issued? (If they’re sold
within two to five years of issue, then the intent of purchase may be
suspicious.) Can investors be assured that the policies were
legitimately acquired, so that the payouts won’t be disputed when the
original policyholder dies?
The NASAA—which represents state securities regulators and warned about
fraud in viaticals in 2002—lists life settlements among the “Top
Investor Traps.” It notes: “While life settlement transactions have
helped some people obtain funds needed for medical expenses and other
purposes, those benefits come at a high price for investors,
particularly senior citizens. Wide-ranging fraudulent practices in the
life settlement market include Ponzi schemes; fraudulent life
expectancy evaluations; inadequate premium reserves that increase
investor costs; and false promises of large profits with minimal risk.”
NASAA points to a recent case in Boise, Idaho, where the state’s
Department of Finance filed a complaint against four companies and
three individuals who sold investments to more than 40 Idaho residents.
The defendants allegedly raised more than $5 million and offered
monthly rates of return of 10%. They told investors that their
investment proceeds would be used to purchase insurance or life
settlement policies. But those policies were never purchased; instead,
the investment funds were sent to out-of-state promoters, who in turn
sent the money to Panama.
To date, 27 states have passed legislation to protect the owners of
life insurance policies. State securities regulators and the SEC have
helped to reduce fraud, but “our members continue to see evidence of
the ‘scam artists’ that once characterized the entire industry,” Joseph
A little advice
If you decide to go forward with a life settlement, the Financial
Industry Regulatory Authority (FINRA)—which has jurisdiction only over
life settlements involving variable policies—suggests asking these
questions (visit the site
for more details with each question):
- Is the life settlement broker or provider licensed in my state? If so, does it have a record of complaints?
- What will happen to my policy? Will the life settlement company buying it hold it themselves? Sell it individually? Or package it with other policies and sell interests in the package to other investors?
- What information will I have to provide? To whom? For how long?
- How can I protect my privacy?
- What’s the best price I can get for my policy?
- What are the transaction costs?
- What are the tax consequences?
- What if I change my mind?
- Is the life settlement in my interest or my investment professional’s?
- Am I being pressured to make a fast decision?
Keep in mind, says FINRA, “When you sell your life insurance policy,
whoever buys it is acquiring a financial interest in your death.”
Published December 31, 2009
Silver Planet Feature Writer