Life Partners Holdings Confirms SEC Probe

<"">Life Partners Holdings Inc., a Texas company that sells investments known as Life Settlements, has acknowledged that it is the subject of a Securities and Exchange Commission (SEC) probe. A Life Settlement, also sometime called a Viatical Settlement, is the sale of an existing life insurance policy to an investor, who will pay required premiums on the policy, then collect its proceeds once the insured dies.

According to a report in The New York Times, the SEC Life Partners probe is focused on the way the firm estimated life expectancies of individuals insured by the policies it sold investors. A life expectancy estimate plays a key role in determining the value of such an investment. The shorter an insured’s life span is expected to be, the more a firm like Life Partners generally can charge investors for that policy. If the insured lives longer than is estimated, the payout is delayed, and investors must keep paying premiums as the person lives on.

Recently, a Wall Street Journal investigation reported a significant portion of insured individuals were outliving Life Partners’ life expectancy estimates, a factor that would cut investors’ returns. Life Partners’ generally touted expected returns of 10 to 15 percent on Life Settlements.

Among other things, the Journal reported that Life Partners Holdings gets life expectancy estimates “from a doctor in Reno, Nev., who has testified for a court case that he never checks the accuracy of his prior predictions.” And it seems life expectancy estimates provided to investors on Life Partners’ Life Settlements are very often inaccurate. For example, In 2002, for example Life Partners put a life expectancy of two years or less on the insured person in a third of the 297 policies it sold, and four years or less on all but a handful. If the projections were accurate, almost all of those policies should have “matured,” with the insured dead, by the end of 2009, but instead the insured had outlived the estimate in 283 of the 297 policies, according to the Journal.

According to The New York Times, Life Partners said in a statement that it’s cooperating with the SEC investigation but that it did not know how long the investigation would take.

While the sale of Life Settlements is perfectly legal, the North American Securities Administrators Association says such products are prone to fraud, including: Ponzi schemes; phony life expectancy evaluations; inadequate premium reserves that increase investor costs; and false promises of large profits with minimal risk. In 2009, Life Settlements made it to the association’s list of the top 10 investor traps.

Since its incorporation in 1991, Life Partners has completed over 127,000 transactions for its worldwide client base of over 27,000 high net worth individuals and institutions in connection with the purchase of over 6,400 policies totaling approximately $2.8 billion in face value.

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