Life Settlements – Viatical Settlements

Fraud and deceptive marketing practices have become the rule rather than the exception in the sale of life settlements and viaticals to investors. Investors who purchase interests in life and viatical settlements face a number of significant risks.

Viatical and life settlements are complex financial arrangements involving both insurance and securities transactions. Before they existed, a person wishing to discontinue a life insurance policy could only surrender the policy for its cash value or simply stop paying premiums, allowing it to lapse. Viatical and life settlements were created to allow an insured to sell his or her policy (or the right to receive the death benefit) to a third party. In exchange for the right to receive the death benefit, the purchaser pays the seller (called a viator) a lump sum (usually more than the cash value but less than the death benefit), pays the premiums, and assumes longevity risk – the risk that the viator will live past a point in time where the cost borne by the purchaser or investor exceeds the death benefit.

Viatical settlements first arose in the 1980s in response to the need of terminally ill AIDS patients to liquidate their life insurance policies in order to pay for medical treatment. The purchaser, usually a viatical company, either holds the policy to “maturity” and collects the death benefit or resells it (or sells interests in a number of policies) to investors.

Fueled by high commissions of up to 30% of the purchase price, the viaticals market expanded, and settlement companies expanded the class of viators to include those who are not terminally ill, but for various reasons no longer need or want their policies, or cannot afford to pay the premiums.

Life settlements are listed on the “watch list” of the Financial Industry Regulatory Authority (FINRA). FINRA is particularly concerned about firms charging investors “hidden, mislabeled or excessive fees.”

“Thousands of investors, many of them senior citizens, have been victimized through fraud and abuse in the sale of viaticals and life settlements,” said Fred J. Joseph, Colorado Securities Commissioner and former president of NASAA (North American Securities Administrators Association). In addition to perpetrating ponzi schemes, Mr. Joseph says, promoters of viatical and life settlement investments have deceived investors by using fraudulent life expectancy charts prepared by “captive” physicians, maintaining inadequate premium reserves, and making false promises of big profits with nominal risk.

The U.S. Securities and Exchange Commission issued a joint investor alert with NASAA warning about the risks of self-directed IRAs, which life settlement promoters often push investors to open because (unlike traditional IRAs) they allow exotic and risky investments, such as life settlements.

Investors who may be considering investing in a viatical or life settlement should be aware of the following risks and problems associated with them:

  • The investment is illiquid. It cannot be readily cashed in. There is no return on the investment until the insured dies and the death benefit is paid.
  • There is no guaranteed return. The return, if any, is the difference between the net death benefit and various costs – the cost of the viatical/life settlement payment to the viator, the cost of the premiums paid, and the cost of fees and expenses. Much of the cost structure varies according to how long the viator lives. Individuals who sell their policies may not be terminally ill or even have a life-threatening illness.
  • In May 2011, the SEC announced that it intended to file an enforcement action against Life Partners Holdings, Inc., a major life settlement company, and two of its executives for misrepresenting the life expectancies of insureds whose life insurance policies it sold to retail investors. The life expectancies were computed by a Reno, Nevada doctor who was paid more than $1.3 million by Life Partners. 95% of the insureds were still living after the estimated life expectancy period.
  • Investors may be told that the death penalty payout is insured by a bond issuer, which is obligated to pay the death benefit if the insured lives beyond the estimated life expectancy. However, such a bond is only as good as the issuer’s ability to pay. In January 2011, the SEC charged Provident Capital Indemnity, Ltd., its president and its auditor with fraud in misrepresenting its ability to meet its obligations with respect to 197 life settlement bonds with a face value of more than $670 million.
  • Premiums must be paid until the insured dies. Investors may have to pay those premiums. If one or more investors fail to pay their pro rata share, the remaining investors may be required to pay them.
  • Insurance companies may refuse to pay the death benefit for various reasons, such as the suicide of the viator within two years of the policy date, or the provision of false medical information by the insured. In January 2011, the Wall Street Journal ran a story on how one life insurance company withheld more than $260 million in death benefits to investors, arguing that life settlements are void as against public policy (“Insurers Sued Over Death Bets”).

If you have investment losses or problems involving life policies or viatical settlements, call the lawyers at Page Perry for experienced representation at (404) 567-4400 or (877) 673-0047 (toll free).