In the last couple years, US life settlement funds have made significant inroads into the UK. Last year, the UK’s securities regulator, the Financial Services Authority (FSA), began approving life settlement funds—opening life settlements to UK investors.

In the US, life settlements expanded rapidly in the early 2000s from less than $1 billion in 1999 to about $12 billion (face value) in 2008. Life settlements then contracted between 2008 and 2010 to about $7 billion. Although estimates from before the financial crisis estimated that life settlements would increase to between $90 and 140 billion in face amount settled by 2016, it’s looking like those projections were far too ambitious.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of life settlements in Advisor’s Journal, see Life Settlements—Savior of Municipal Finance? (CC 11-97), Life Settlement Provider Accused of Falsifying Life Span Reports (CC 11-23).

For in-depth analysis of life settlements, see Advisor’s Main Library: A—Life Settlements—Introduction.

The Texas state securities board is the latest government agency to pile onto Life Partners Holdings, with Texas Securities Commissioner Benette L. Zivley suing the life settlement provider for failing to respond to subpoenas issued by the State Securities Board.

The life settlement provider is suspected of misleading investors who invested in life insurance policies and not individuals who sold their life insurance policies to Life Partners.

The lawsuit asks the Travis County state district court to force Life Partners to respond to the subpoenas, which would require the company to divulge records of its marketing and sale of investments in life settlements.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the Life Partners Holdings mess in Advisor’s Journal, see Life Partners Holdings Hit with Class-Action Lawsuit (CC 11-36), Life Settlement Provider Accused of Falsifying Life Span Reports (CC 11-23), & Life Settlements Funds Performance Fees under Scrutiny (CC 10-116).

For in-depth analysis of life settlements, see Advisor’s Main Library: A—Life Settlements—Introduction.

Life settlements offer diversity because their returns are uncorrelated to the markets. But are they a viable financing vehicle for municipal finance? Rancho Mirage California City Councilman Scott Hines thinks so.

Under Hines’ plan, the city would issue bonds, with most of the issue proceeds being used to finance city projects. The remaining funds would be invested in life settlements with an aggregate face value equal to the face value of the bond issue. Payouts on the life settlements would then be used to pay back bond principal.

Instead of the typical municipal bond financing arrangement, where tax dollars are used to pay back both principal and interest on an issue, Hines’ plan would leave taxpayers with only a bill for interest payments.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of life settlements in Advisor’s Journal, see Life Settlement Provider Accused of Falsifying Life Span Reports (CC 11-23).

The New York Department of Insurance, Office of General Counsel, held on February 25, 2011 that insurance carriers cannot refuse to convert a term policy to a permanent policy on the ground that the policy will be sold on the secondary market. The primary issue in the case was whether the converted policy is a “new” policy that must satisfy anew the insurable interest requirement. Nevertheless, this ruling will not affect all term policies, since many term life insurance policies are not convertible. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of life settlements, see Advisor’s Main Library: B–The Life Settlement Industry.

Life Partners Holdings, Inc. investors have filed a class-action lawsuit against the Waco Texas based life settlement provider, alleging that its directors and officers violated securities laws. The lawsuit comes a month after an announcement was made that the publically-traded company is the subject of an SEC investigation into the life expectancies the company uses to value the life insurance policies it sells to its customers. Life Partners is accused of misleading its customers—investors in life insurance policy—about the life expectancies of insureds on the policies it sells, with insureds outliving the life settlement company’s life expectancy estimates 90% of the time.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of life settlements in Advisor’s Journal, see Life Settlement Provider Accused of Falsifying Life Span Reports (CC 11-23), Life Settlements Funds Performance Fees under Scrutiny (CC 10-116) & Should the Basis of a Life Contract be Adjusted by Mortality Charges? Rev. Rul. 2009-13 Says Yes in Context of Life Settlements; Certain Amounts over Adjusted Basis Treated as Capital Gains (CC 09-19).

For in-depth analysis of life settlements, see Advisor’s Main Library: A—Life Settlements—Introduction.

One of the U.S.’s oldest life settlement companies, publically traded Life Partners Holdings, Inc., is being investigated by the SEC for falsifying life span reports used to sell the company’s life settlement products.  Falsified life spans can leave investors on the hook for additional premiums over the insureds’ remaining years when insureds outlive the firm’s life-span estimates.

The question for Life Partners Holdings shareholders and customers is whether the Life Partners investigation will go the way of Mutual Benefits Corp, a life settlement company that sold fractional interests in life insurance policies. Mutual Benefits was the subject of a similar SEC investigation concerning falsified life expectancies that ultimately led to the company’s collapse.  Could Life Partners be next?

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

Life settlement funds’ fees are coming under scrutiny, with some funds charging performance fees as high as 75 percent.

Life settlement funds—which purchase life insurance policies from the sick and elderly and collect death benefits when the insureds die—can offer consistent, uncorrelated returns but also pose significant risks to investors due to their cash flow needs and the uncertainty of returns on life insurance policies.  These risks are further exacerbated when funds charge excessive fees. And many funds are unregulated offshore entities—which adds an additional set of risks.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of life settlements in Advisor’s Journal, see NCOIL Adopts Model Act Requiring Insurers to Inform Consumers of Settlement Options (CC 10-104), New York Court of Appeals Upholds STOLI Arrangement (CC 10-106), and Should the Basis of a Life Contract be Adjusted by Mortality Charges? Rev. Rul. 2009-13 Says Yes in Context of Life Settlements; Certain Amounts over Adjusted Basis Treated as Capital Gains (CC 09-19).

In a contentious move, the National Conference of Insurance Legislators (NCOIL) executive committee voted unanimously to adopt the Life Insurance Consumer Disclosure Model Act, (Model Act), which requires life insurance carriers to notify policy owners of settlement options when the policy owner is considering surrendering the policy or when the policy is set to lapse.

The life settlement industry is giddy over the Model Act—which should boost their business. But the insurance industry outlook on the Act is not so rosy—settlement essentially ensures that policies will not lapse before death benefits are paid and that many policy owners will choose settlement over carrier options like accelerated death benefits and policy surrender. Not all policy owners have a right to disclosure about settlements under the Model Act.  The disclosure requirement applies only where the insured is sixty years old or older or “is known by the insurer to be terminally ill or chronically ill” and … read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of life insurance settlement options in Advisor’s Journal, see Don’t Overlook Beneficiary Designations and Settlement Options (CC 09-28)

We invite your questions and comments by posting them or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers?  Discusses the general market conditions of life settlements.  Also provides reasons why some policy holders may consider selling their interests.   

As discussed earlier this week, a traditional life-settlement transaction consists of an third party purchasing an unknown individual’s life insurance policy for consideration.  The purchaser continues to pay the premiums until a death benefit is collected, the contract is sold to another individual or business, or is surrendered. 

The Wall Street Journal attributes the creation of the industry “back to the 1980s, when [terminally ill] patients sold their policies to raise cash for medical treatments.”   The Journal also notes, the “market boomed earlier this decade, as hedge funds eager for offbeat alternative investments piled in.”  [1]

Since the decline in overall macroeconomic market conditions, “the total face value of policies purchased in the secondary market fell to $7 billion in 2009 from $13 billion in 2008”.  “Prices for policies, meanwhile, fell to an average of 13% of the death benefit in 2009 from 21% in 2006.” [2]  Nevertheless, industry experts are expecting a rise again in total market figures by the end of 2010.  It is not surprising given the SEC’s new enforcement efforts discussed below. 

There is significant data nevertheless that consumers “benefit from a robust secondary market for life policies.”[3]  “Before the life-settlement industry grew, life-insurance companies were the sole buyers of unwanted policies. Now consumers have a choice, and the chance to get more if they cash their policies in.” [4]  “Selling an insurance policy frees up cash for current needs, such as pricey long-term-care insurance, especially if the policyholder doesn’t have other assets that can be easily liquidated to pay the premiums.” [5]

There are a number of “factors that would induce a policyowner” to decide to sell their policy to a third party.  First, a “policyowner might not be able to afford to keep a whole life policy in force before death—especially if his income stream unexpectedly declines or if the premiums increase or both.” [6]  Secondly, a policyholder might own multiple policies and no longer have an insurable need for that amount.  Other reasons may include but are not limited to: [7]

• The beneficiary for whom the policy was originally purchased is now deceased or no longer has a need for the policy.

• A reduction in the value of the policyowner’s estate reduces the tax liability for which the life insurance policy was designed to provide.

• The policyowner wishes to donate highly appreciated assets to charity, but would be faced with liquidity constraints as the result of such a donation.

• The policyowner can no longer afford to pay the premiums on the policy, and it is not feasible for him to keep the policy in force by using any program offered by the insurance carrier (such as borrowing the premium against the death benefit of the policy)

Just last month the Securities and Exchange Commission released a report “recommending that life settlements be clearly defined as securities so that the investors in these transactions are protected under the federal securities laws.” [8]  The new regulation would encourage more investors to consider life settlements as viable investments.

Next week’s blogticles will discuss the taxes Americans pay generally.  After-all Halloween is approaching and the subject is rather scary. 

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

[1] Anne Tergesen and Leslie Scism.  “Life Insurance: Think Before You Sell Your Policy for Cash”.  Wall Street Journal Weekend Investor. September 18, 2010.  http://online.wsj.com/article/SB10001424052748704190704575490070397807704.html?KEYWORDS=life+settlements.  Last Accessed 10/15/2010. 

[2] Wall Street Journal noting a Recent Report by the U.S. Government Accountability Office. 

[3] Hal J. Singer, Eric Stallard.  “Reply To The Life Settlements Market: An Actuarial Perspective on Consumer Economic Value” at 2.  2005.  https://www.lifesettlementfinancial.com/pdf/Reply_Deloitte_Study.pdf.  Last Accessed 10/15/10. 

[4] “New Lease onLife: The Secondary Market in Life-Insurance Policies is Good for Consumers”.  The Economist.  May 17, 2003.

[5] Rachel Silverman.  “Recognizing Life Insurance’s Value”.  Wall Street Journal.  May 31, 2005. 

[6] Singer at 17. 

[7] Id. 

[8] SEC Releases Report of the Life Settlements Task Force 2010-129.  http://www.sec.gov/news/press/2010/2010-129.htm.  Washington, D.C., July 22, 2010.  Citing, “Staff Report to the United States Securities and Exchange Commission”.  July 22, 2010.  Life Settlements Task Force.  http://www.sec.gov/news/studies/2010/lifesettlements-report.pdf.