Life Settlements: Seniors Beware

Investor Alert – The National Association of Securities Dealers (NASD) issued an Investor Alert on life settlements in February 2007 entitled Seniors Beware: what you should know about life settlements. The Alert warned owners of existing life insurance policies with significant cash value to consider very carefully before selling their policies to life settlement firms. Life Settlements are also known as Senior Settlements, Stranger Owned Life Insurance (SOLI), or Investor Owned Life Insurance (IOLI).

In recent years, life settlement companies have been trying to convince policyholders ages 65 and older nationwide to sell their life insurance policies for more than the cash surrender value but less than the net death benefit. The life settlement companies pay the remaining premiums but pocket the death benefit when the policyholder dies. NASD said life settlements can be suitable if policyholders no longer need the insurance or can’t afford to continue paying the premiums. NASD warned policyholders to:

  1. Consider ongoing life insurance needs and, less costly alternatives.
  2. The impact of selling the policy on their finances including the policyholder’s eligibility for assistance programs such as Medicaid after the policy is sold.

Life settlements require policyholders to divulge medical and other personal information. NASD warned it can also be difficult to determine whether the life settlement company is giving you a fair price for your policy. NASD warned seniors the life settlement industry may target policyholders in poor health and can be prone to aggressive sales tactics and abuse.

NASD Chairman Mary Schapiro concluded “life settlements can be a valuable source of liquidity for people who no longer want or need their current policies, life settlements can have high transaction costs and can have negative consequences for your financial situation. And it is very difficult to determine whether you are getting a fair price for your policy. The best advice is to proceed with caution.”

A recent analysis by Deloitte Consulting and the University of Connecticut concluded,

“for the majority of policyholders with impaired health, The greatest economic value results from retaining the contract until death. With proper education, training and disclosures, it is likely that the target market that could truly benefit from the Life Settlements industry is significantly smaller than currently perceived.”

North Dakota Insurance Commissioner Jim Poolman offered these consumer tips for anyone considering selling their existing life insurance policy to a life settlement company:

Consumer Cautions

If you decide a life settlement is a sensible solution for you, shop carefully.

Find out if the life settlement company and broker are licensed to do business in your state and are in good standing. While licensing requirements vary, “almost every state insurance department has some sort of license,” Poolman says.

Ask to see all offers the broker gets from potential buyers. “The commission might be better for the broker on one or two of the offers,” Poolman explains. Be sure you see all offers so you can choose what’s best for you, not the broker. If you sell your life insurance policy for a life settlement, your beneficiaries get nothing.

Ask to see both gross and net offers. The gross offer is what the investor offers for the policy. The net offer is what the broker offers you. “On a $1 million policy, you could be presented with a $200,000 offer from the broker,” Poolman says, “when actually the gross offer was $400,000. The broker and the life settlement company are eating up $200,000 in commissions and fees.”

Ask for disclosure of any conflict of interest or third-party transaction. “A life settlement company might pay off other life settlement companies so they don’t make an offer,” Poolman says. “That way the original company can bid lower, and their return on that policy is higher. It’s basically bid rigging.”

Information and Articles:

Life Settlements – Life Insurance Rescue
Selling Yourself Short (Market Watch)
Watch Out for ‘Senior Settlements’ (AARP)

James Hoyer is investigating the life settlement industry. If you sold your existing life insurance policy to a life settlement company or your life insurance company tried to convince you not to sell your existing policy to a a life settlement firm we would like to hear from you.