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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Sunday, September 6, 2009

Selling Life Settlements of Old and Sick is Wall St.'s "Next Big Thing"

The New York Times has a disturbing front-page article, New Exotic Investments Emerging on Wall St. (by Jenny Anderson), recounting the latest "exotic investment" Wall St. is planning -- securitization of "life settlements."  Life settlements involve the sale of life insurance policies by the ill or elderly for cash to promoters who then bundle them and sell participations to investors.  Securities professors are familiar with viatical settlements from the 1996 SEC v. Life Partners opinion, in which the D.C. Circuit bizarrely stated that these interests were not securities because the investors' reliance on the efforts of others only occurred at the pre-investment stage and thereafter profitability turned on the number of years the insured continued to live.  The article quotes professionals as saying these are the "next big thing" because  the risks of the investment do not correlate with market-based investments, thus allowing for diversification of risk.  In the 1980s, viatical settlements proved to be poor investments because with drug therapies, the life expectancy of AIDs patients proved to be longer than "bargained for."  But Wall St. says that they have become more sophisticated and that there are ratings agencies that can accurately assess the risk of these investments.

Never underestimate the unrepentent greed of Wall St.

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First of all converting what would be an income tax free event, that being, a death benefit paid out to the initially designated beneficiary, such as a spouse or children, to an investor which would be taxable based on Rev Ruling 2009-14 would seem to me to be a thing the current administration would gladly support. Second, policy holders are not being talked out of exisiting life insurance policies, they are attempting to receive an economic benefit greater than that being afforded to them by the life insurance company that issued the policy. They are going to surrender or let lapse a policy they no longer want or need. Third, the $35 million your refer to I believe is face amount of policies not settlement value, cash value, or premium that needs to be paid by the investor up to time of claim. Fourth, life settlements are for insureds who are NOT terminally ill but are over the age of 65. This industry is regulated in many states to extent unseen or unheard of for any transaction involving insurance. When a person purchases a life insurance policy, properly referred to as an insurance contract, they acquire certain rights. One of those rights recognized by the U.S. Suprement Court in 1911 was the right of the policy owner to sell their rights in the contract to a third party. The people who benefit from a life settlement are the ones who own those rights, namely the policy owner. How they benefit is by being able to obtain the true value of the policy instead of merely receiving the cash surrender value upon surrender or nothing upon letting the policy lapse. If a person no longer wants or needs their life insurance then why should they be denied the opportunity to receive a value greater than the cash surrender value but less then the death benefit? Instead it is the life insurance company that reaps the total economic benefit from the surrender or lapse. How can a free market exist if it is not permissable for a policy owner to seek out the advice and counsel, for example, of their CPA, Lawyer, Insurance Agent, Financial Advisor or Financial Planner to help them determine what a fair value is? or for that matter being prohibited from exercising a contractual right? Along the same line of reasoning, are insured’s capable of estimating whether or not the initial purchase of their cash value policies was a fair deal and that they were not being cheated? Imagine that the insured is being served by an AGENT of the INSURER. The agent is not a fiduciary of the insured. In regulated states the life settlement broker, is a fiduciary to the insured and policy owner to act in their best interests and to follow their instructions. Imagine the life insurance industry putting in force policies based on lapsed based pricing assumptions, meaning they have full knowledge and belief that the policies will in fact lapse in 5-7 years therefore no claims will be paid. So would you then say that the public is being cheated because they bought permanent insurance which is under-priced knowing full well that the public is not going to reap any financial benefit upon lapse or surrender? Life insurance premiums are potentially on the rise because of stiffer reserve requirements set by the states, not because of life settlement activity. Remember “the market is still minuscule”. Are you not concerned that there is an industry that readily admits that they do not want to face contractual claims they put in force for fear they will not have enough funds to pay them? That is the risk they face being an insurer and mispricing their policies. The policy owner, the consumer, is the one that benefits from a life settlement. Why should they have this right and economic opportunity denied them? Finally, the investors are large financial institutions and are already regulated. Perhaps the regulations already on the books need to enforced or enforced better.

Posted by: stuart egrin | Sep 8, 2009 2:02:50 PM

I recently came across your blog and have been reading about Commercial Liability Insurance. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

Posted by: Commercial Liability Insurance | Sep 11, 2009 7:05:47 AM

Whomever posted the original "Never underestimate the unrepentent greed of Wall Street" has shallow analytical skills at best.

I appreciate the thoughtful retort of the second post which highlights objective insight.

While @90% of policies lapse or are cancelled, if an advisor [CPA, Attorney, Ins Agent, Investment Advisor] does not avail their client of this option, they are guilty of malpractice.

Posted by: Chris | Oct 21, 2009 1:27:47 PM

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