The Securities Exchange Commission (SEC) began 2012 by charging Life Partners Holdings Inc. and three of its senior executives for their “involvement in a fraudulent disclosure and accounting scheme.” One SEC official commented that, “The senior-most executives at Life Partners concealed significant risks to the business, manipulated financial statements with improper accounting, and
knowingly profited from their misconduct by executing insider trades based on information that was not available to the public.”
For quite some time, the life settlement (sometimes referred to as the senior settlement) industry has been under scrutiny. FINRA (the Financial Industry Regulatory Authority) has issued an investor alert entitled, “Seniors Beware: What You Should Know About LifeSettlements.” One recent report
estimates that existing policies with a collective face value of $11.8 billion were sold by policyholders to investors in 2008. In light of the size of the marketplace, and the SEC’s complaint against Life Partners, let’s examine the guidance contained in FINRA’s investor alert.
First, what is a life settlement? According to FINRA, a life settlement involves selling an existing life insurance policy to a third party—a person or an entity other than the company that issued the policy—for more than the policy's cash surrender value, but less than the net death benefit. The purchasers then continue to maintain the policy in force, by paying its premiums, until the seller’s death, at which time the purchasers receive the death benefit.
Second, what factors should one consider in determining whether to sell his or her life insurance policy? As a preliminary matter, an insured should sell his or her life insurance policy only if he or she no longer wants it or needs it, or cannot afford the premiums. Beyond that, FINRA details ten factors to consider.
- Ongoing Life Insurance Needs—If you are considering buying a new policy with the proceeds of
the life settlement, you will need to determine whether you will be able to get a new policy with equivalent coverage—and at what cost. Your old policy will still be in force and may affect your ability to get additional coverage. Even if you can get a new policy, you may have to pay higher premiums because of your age or changes in your health status.
- Less Costly Alternatives—If one of the factors driving your decision is a need for cash, be aware that surrendering your life insurance policy for its cash value or pursuing a life
settlement are not your only options - especially if you would ideally like to retain your coverage. For example, you might want to see whether you can borrow against your policy. You might also be eligible for accelerated death benefits, which allow an individual with a long-term, catastrophic, or terminal illness to receive benefits on his or her policy prior to dying.
- Difficulty Determining Fair Prices—One of the hardest things to know when you are selling a life
insurance policy is whether you are getting a fair price for your policy. There is no transparent secondary market for life insurance policies. The best way to make sure you are getting a fair price is to shop around.
- Impact on Your Finances—A cash payment from a life settlement can have unintended financial consequences, especially if your financial circumstances have changed from when you first
bought the policy. For example, if you currently receive state or federal public assistance, such as Medicaid, a life settlement can negatively impact your ability to participate in that program. Before you proceed with a life settlement, be sure you fully understand the financial implications for you and your family.
- Impact on Your Survivors—Consider carefully your need for current income against the future financial needs of your survivors. Even if you have determined that they do not need the proceeds from your insurance policy at this time, ask whether there could be a chance
that this situation could change. If so, ask yourself whether you can obtain the liquidity you seek from other sources or by trying alternative ways to tap into the insurance proceeds as suggested above.
Third, FINRA details questions to ask the life settlement broker or provider. Those questions include whether the broker or provider is licensed in the state with either the state insurance commissioner
or with FINRA. Additional questions that FINRA suggests are:
- What information will I have to provide? To whom? For how long? When you sell your life insurance policy, you will have to sign a release authorizing the release of medical and other
personal information so that the buyer can determine how much to offer for your policy.
- What's the best price I can get for my policy? If you are using a life settlement broker, ask
what bids were received, and what steps the broker used to make sure you are being offered the most competitive price available.
- What are the transaction costs? Life settlements can have high transaction costs. The commissions paid by life settlement companies to life settlement brokers and other
financial professionals involved in the transaction can be as high as 30%.
- What if I change my mind? Always remember that you do not have to accept an offer to purchase your life insurance policy, even if you shopped around for the best price.
- Am I being pressured to make a fast decision? If you feel that you are being subjected to
high-pressure sales tactics, and other aggressive advertising, marketing and sales efforts, beware. A legitimate investment professional will provide clear answers to your questions and will give you the time you need to make an informed decision.
In conclusion, seniors and others must be cautious in determining whether life settlements are appropriate for them. FINRA’s investor alert is a helpful template to help insureds protect themselves.