Secondary Life Insurance Policy Market Coming Under Scrutiny

Older people who purchased life insurance policies to “flip” on the secondary life insurance market are now filing lawsuits claiming they were misled into paying premiums on policies that ultimately found no buyers. These claimants constitute the other side of the <"">life settlements market, a type of investment vehicle critics say is rife with fraud.

A life settlement, sometimes called a viatical settlement, is the sale of an existing life insurance policy to an investor who will pay required premiums on the policy, collecting its proceeds once the insured dies. According to a report in The Wall Street Journal, at the height of the secondary insurance market, tens of thousands of older people sought to make fast cash by taking out multimillion-dollar policies to sell to investors.

But like many other investment markets, the market for life settlements went south in 2008. Many of those who had purchased expensive life insurance policies with the intent of selling them to investors were stuck with the policies – and the premiums that went with them.

Many of the lawsuits filed by these policy purchasers claim that they were told they wouldn’t have to pay anything to turn a profit on the transaction. Among other things, such lawsuits allege the insured were misled about the costs of the premiums and their responsibility for them should no buyer emerge.

As we’ve reported previously, many investors on the other side of life settlements have also been less than happy with the way these investments have turned out. Among other things, questions have been raised about the methods life settlement marketers use to estimate life expectancies. These estimates—a way that they calculate how long the people might have to live— are used to predict a life settlement’s rate of return.

Recently, one life settlement marketer – Texas-based <"">Life Partners Holdings – has been scrutinized for the way it marketed life settlements. 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. According to the Wall Street Journal, 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.

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.”

Life Partners’ methodology for estimating life expectancies is now the subject of an investigation by the U.S. Securities and Exchange Commission, and the company recently announced it was reducing some of rates of return it had promoted for its life settlement investments.

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