Life Settlements
The NYSID has quite recently proposed legislation to regulate life settlements. Superintendent Dinallo stated: "In these times of economic uncertainty, there is strong pressure on people pressed for cash to sell valuable assets, such as life insurance policies. This bill protects consumers by establishing a transparent marketplace with specific licensing, registration and disclosure requirements."
If reinforcement of the need for such legislation were needed, Jason M Breslow of Bloomberg.com is reporting in an [article] today that prices on policies are falling as more senior citizens turn to their life insurance policies as a salable asset to get them through these hard times. The lead in Mr. Breslow's story is "Retirees seeking extra cash last year could sell a $5 million life insurance policy to investors for $1 million. Today, the price is as low as $600,000." A number of factors are at work in falling prices, but an increasing supply of policies for sale is one. Breslow quotes Brian Pardo, Chairman of Life Partners Holdings of Waco, Texas as saying: "Senior citizens 'are really seriously in financial trouble' with no real way to raise cash besides selling assets that they may not want to part with at "garage-sale prices...We don't have enough investment capital to buy all of that." It is seriously troubling to me to think about seniors facing choices such as losing their home or selling a life policy they bought to leave for their beneficiaries. I am glad life settlements have the attention of state regulators across the country!
In a section of Mr. Breslow's article that exemplifies just how mercenary this industry has become, he reports that investors are now only interested in larger policies on older individuals with shorter life expectancies than just a year ago. Of course, shorter life expectancies and older policyholders mean higher returns for the investor. Remember though that these returns on investment accrue only upon the death of an individual - a real human being. Someone's parent or grandparent must die for these disinterested investors to get the 16 percent return that Breslow's article reports is the current investor expectation! In today's economy how many places can one get a 16 percent return? So more and more people elect to bet on someone else's death to make money. But they want a sure thing and with desperate policy owners forced to take "garage sale prices" for their policies they are getting their 16 percent this year according to Doug Head, executive director of the Life Insurance Settlement Association in Orlando Florida. Last year investors were satisfied with just 11% according to Head.
Why be satisfied with "just" 11% when more desperate senior citizens can be convinced to sacrifice their life insurance policies and 16% is possible?
Another concern with an unregulated life settlement industry is their potential for use in a Ponzi scheme. It's not outside the realm of possibility for a Ponzi schemer to provide 'access' to life settlements, promising high returns, and then just use the money from new customers to pay the high returns to the old. This is apparently what Stanford was doing, except with high-rate certificate of deposits. We need a regulator in there to protect investors, as well as seniors.
In regards to the article that appeared in this past weekend’s NY Times I felt it necessary to weigh-in on the issue.
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 existing 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, life settlements are for insureds that 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. Supreme 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 permissible 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?
When being sold life insurance in the first place 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.
The life insurance industry has been 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 they fully expect that 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 true 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 [life settlement] market is still minuscule”.
The public should be 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.