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Florida’s Office of Insurance Regulation to Hold Public Hearing on Life Insurance Companies’ Practices
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On Friday, April 22, 2011, on Florida’s Office of Insurance Regulation’s website, the following article appeared: The Office will conduct a public hearing to evaluate a potential industry practice that involves claim settlement practices, use of the U.S. Social Security Administration’s Death Master File and compliance with unclaimed property laws.
It was announced that the Florida Office of Insurance Regulation (Office) delivered investigative subpoenas to Metropolitan Life Insurance Co. and Nationwide Life Insurance Co. requesting that a corporate representative appear in Tallahassee to explain their company’s business practices regarding these issues. Although these are the first companies to receive subpoenas – the Office is examining other companies on this issue because the Office’s information encompasses a substantial part of the life insurance industry.
Call a Securities Arbitration Lawyer for a free consultation on how to recover your investment losses. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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In a recent article from the Wall Street Journal we learn that the Securities and Exchange Commission (SEC) is investigating Life Partners Holdings Inc., a Waco, Texas, company that has arranged for investors to buy several billion dollars of life-insurance policies from their original owners, according to people who have been contacted recently by the agency.
The SEC’s enforcement division has been seeking experts to analyze the way Life Partners has estimated the life expectancies of the insured individuals, these people say. The estimates—projections of how long the people might have to live—are a crucial part of the investment equation.
The shorter an insured person’s expected life span, the more Life Partners generally can charge for that policy, because investors expect a faster payout. If the death comes later than anticipated, not only is the policy payout delayed, but investors who buy policies or parts of them must continue to pay premium bills while they wait to collect on a death benefit.
Questions about the accuracy of Life Partners’ life-expectancy estimates were the focus of a December Page One article in The Wall Street Journal. The article reported that many of the insured people are living well beyond the company’s estimates, suggesting that the 10% or 15% yearly returns promoted to Life Partners’ investor clients may prove elusive for many.
The article says that attractive projected returns for clients are a key part of Life Partners’ formula for success. One of the fastest-growing small companies in the U.S. in recent years, Life Partners reported earnings of $29.4 million on $113 million of revenue for its fiscal year ended Feb. 28, 2010.
Life Partners says it has sold 6,400 policies with a face value of $2.8 billion to 27,000 clients since its 1991 founding. Life Partners extracts often-hefty fees in the deals, averaging $308,000 apiece for the 201 policies sold in its most recent fiscal year. Investors often buy pieces of multiple policies.
The Journal article goes on to say that based on data Life Partners filed with the Texas Department of Insurance, the Journal found that, for policies sold from 2002 through 2005, insured people outlived Life Partners’ projections about 90% of the time.
If you or a family member have purchased policies through Life Partners Holdings, Inc. and become a victim of the life-expectancy predicitons, call a Securities Arbitration Lawyer for a free consultation on how to recover your investment losses. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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In an article about Florida Viaticals, in “The Florida Bar Journal” by Michael Cavendish, he writes, about 10 years ago, a new cottage industry sprang from the ranks of America’s venture capitalists. Some enterprising person noticed that certain well-to-do, terminal AIDS patients required medical treatment and living expenses after losing their jobs and employer-provided health insurance. Among these were people who were temporarily destitute but with current life insurance policies. Their dilemma was that the policy benefit was needed immediately for medical treatment, experimental cure drugs, or funds to provide a dignified existence, but the benefit funds would not be available until death–when they were no longer needed.
And into this difficult situation strode the venture capitalists, offering the sick insured a viatical settlement, an immediate lump sum cash payment in return for an assignment of the insured’s death benefit. The insured, or viator, was free to spend the cash as desired, and the investor assumed the responsibility of keeping the policy and the premiums current. The transaction seemed simple. The viator received cash when unemployable and uninsurable, and, upon the viator’s death, the investor collected the death benefit and, after subtracting the settlement amount, premiums, and administrative expenses, an attractive return. As the venture capitalists grew in sophistication and medical knowledge, they began to consider other types of terminal disease patients and elderly insureds as potential viators as well.
However, the viatical trade was unregulated, and even unknown in some areas of the country. Bad feelings arose over the industry’s perceived role as investors in the imminent demise of unfortunate, terminally ill, diseased persons. Allegations of insurance fraud arose in some quarters, and privacy concerns exploded as some firms began to take a comprehensive medical and mathematical interest in the gritty details of the health of aviator. Regulation continued to develop even when most people outside of the AIDS community and the fringe of venture capitalism had not heard of the practice of viatical settlements.
Florida, a demographic leader in AIDS patients and a state with a significant elder population, has taken significant steps to investigate and regulate the viatical trade. Florida’s Viatical Settlement Act, revised in 1999 by H.B. 2235, was drafted to regulate the brokers, financiers, and sales agents of the viatical business, and to protect both the viator and the nonprofessional investor from misrepresentations and nondisclosure of the risks of this still-evolving industry. This article examines Florida’s regulation of the young viatical industry and offers suggestions for promoting fair, protective viatical settlement regulations for Florida residents.
The viatical settlements are a 10-year-old investment industry built upon the mature life insurance policies of the old and terminally ill. Viatical investment firms buy life insurance policies at a discount, typically between 20 and 40 percent less than face value. The buyer takes over the payment of premiums from the insured and collects the insured’s death benefit upon the insured’s demise.
Viatical industry reputedly began when opportunistic venture capitalists began purchasing the life policies of endstage AIDS patients at a discount. The industry grew rapidly, brokering $90 million worth of life insurance benefits after its first year of existence. The growth has been geometric. One observer forecasted the viatical settlement market to reach $4 billion per year by this year.
The name viatical derives from the Latin viaticum–roughly translated meaning “provisions for a long journey.” Industry pundits claim that the viaticum was a package of money or food given to Roman soldiers before embarking on a perilous campaign.
How Viaticals Work
Typically, in viatical settlement transactions, the insured (viator) agrees to sell and assign his or her life insurance policy through a broker to an investment firm. The investment firm may then bundle a number of policies together and resell them in fractions to dozens of individual investors, much like a REIT or a mortgage-backed security. The investment firm may also sell an individual policy or a fraction of an individual policy to a single investor, tying that investor’s return directly to the life expectancy of a single viator.
* Benefits to the Viator
The viatical settlements are slowly gaining recognition as an often helpful money management alternative for the very sick and very old, partly because of the favorable tax treatment for viatical settlements laid out in the Health Insurance Portability and Accountability Act of 1996. Viatical settlements are expressly excluded from the terminally ill viator’s gross income for tax purposes because they are technically considered payments rendered by reason of death.
By avoiding the payment of taxes, viators can finance additional medical care and meet living expenses for a longer period. The generous tax treatment, allowing viators to retain 100 percent of their settlement, is predicted to lead to increased life insurance sales, as more healthy individuals learn that they can viaticate their policies in the event of a terminal illness. This tax treatment may change in the future, however, as viatical settlements become more commonplace and greater volumes of money move through them.
* Benefits to the Investor
Investing in viaticals is increasingly commonplace in the United States. An active secondary market for viatical settlements has developed, and most anyone can now invest in viaticals through a network of independent financial planners and life insurance agents. Viaticals have not been labeled as more lucrative, safer, or riskier than traditional debt, equity, and real estate investments, but they are undoubtedly based upon an entirely different calculus than those traditional investments. Viaticals, for instance, are immune to interest rate concerns and economic growth or stagnation. For this reason, some investors may prefer viaticals to traditional modes of investment.
* Expansion of the Market
The viatical investment firms are now branching out beyond AIDS patients and those with terminal diseases. Firms are considering persons with maladies such as cancer and heart disease as a larger potential market. Viatical calculations are based on mortality rates and patient-specific medical diagnoses, so, theoretically, an investment firm could offer a viatical settlement to anyone with an assignable life insurance policy, so long as the firm can reasonably predict the viator’s life expectancy.
Business “key man” policies may become a popular target for viatical investors.Key man policies are sold widely to small and medium-sized businesses which depend upon the knowledge or contacts of an executive or owner to continue to flourish. Sometimes the key man becomes less critical to the business in a financial sense because the aptitudes of other executives or employees have improved or because the key man wishes to retire. Instead of allowing the policy to lapse or converting to an expensive life policy, some businesses may view a lump sum viatical settlement as an effective way to recapture amounts spent on premiums over the years. Again, the prospects of receiving an offer from a viatical investment firm depend largely on the health and age of the insured.
The recent upswing in sales of term life insurance policies can turn even healthy elderly persons into attractive viatical candidates. New growth in viatical investing flows toward wealthy elderly persons with jumbo life policies of a half-million dollars or more. These new jumbo viaticals, sometimes called “high net worth transactions” or “senior settlements,” are touted as a form of estate planning to healthy older individuals who may willingly sacrifice a death benefit which is no longer needed to bear an estate tax burden, or who do not want to continue tying up their cash in high insurance premiums. Caution is called for, however, as the healthy high net worth individual or key man may not qualify for the same favorable tax treatment that HIPAA affords to terminally ill and diseased viators.
Partly in response to the growth of the viatical industry, traditional life insurance companies have been offering accelerated benefit payouts or “living settlements” to certain terminally ill insureds. Accelerated benefit programs are popular with insurers who can cut their death benefit expenses by the amount of the payout reduction. While a handful of insurers will pay a terminally ill insured between 90 and 95 percent of the death benefit, most insurers pay settlements comparable to those offered by viatical investment firms, and many insurance companies have strict criteria for accelerated benefit applicants, usually a life expectancy of between six months and one year, confirmed by the insurer’s experts.
Some employer-sponsored group life policies can be viaticated, although this option is not often disclosed to employees in their benefits manuals. The availability of viatication as an option to terminally ill group life policy holders will depend upon restrictions built into the policy, such as assignability and contestability clauses.
* Policy Concerns
For the viator, privacy has become an issue in viatical settlements. At least one Florida court has questioned whether viators have a continuing right of privacy in their medical records once their health becomes an essential element of a commercial transaction. Florida’s Insurance Code provides that once the viator’s records are held by a licensee, they are subject to review by the Department of Insurance.Whether those records can properly be disclosed to a private third party remains unresolved.
For viatical investors, risk and remorse are two common concerns, one financial and one emotional. First, the experts agree that viaticals are a risky investment. An investor cannot recover his or her investment until the death of the viator, making it problematic for the investor to get to cash when needed. There is a secondary market and the resale of a viatical is possible in theory, but in practice there may be few buyers for a viatical investment which has lost value because the viator has recovered or is outliving the prognosis.
Second, from an emotional standpoint, viaticals are not an appropriate investment for many people. Without mincing words, viatical investors collect when their viator dies. Worse yet, the sooner death occurs, the larger the investor’s return. These feelings can be overcome, and the viatical settlement can operate as a compassionate and humanitarian investment in the case of a truly terminally ill person in dire need of money to pay the rent. To that effect, some viatical investment firms claim that most viators are grateful to receive cash settlements of their life policies. Nevertheless, those who invest in viaticals repeatedly will sooner or later find their nest egg uncomfortably subject to a sick person who exceeds his or her life expectancy, an unthinkable situation for most people that leads some viatical investors to feelings of remorse and thoughts of rescinding the investment contract, which is usually not an option.
While solutions for privacy and remorse are difficult to legislate, in answer to investor and viator education concerns, the National Association of Insurance Commissioners in 1993-94 promulgated a Model Act and a Model Regulation on viatical settlement contracts. Florida’s regulatory scheme for viatical settlements closely resembles the NAIC’s Model Act in many respects.
Florida regulates viatical settlements with an eye toward the insured, the ultimate investor, and the middlemen. The Viatical Settlement Act defines the various parties involved in a viatical transaction as follows:
The viator is an insured with a catastrophic or life-threatening illness who enters into a viatical settlement contract.
The viatical settlement broker is one who, on behalf of aviator for a fee or commission, offers or attempts to negotiate viatical settlement contracts between a Florida viator and one or more investment firms, called viatical settlement providers. Brokers typically work closely with viators and collect their commissions from providers after the contract has been executed.
The viatical settlement provider is defined as a person who, in or from Florida, effectuates a viatical settlement contract. Banks, life and health insurers, natural persons who enter into no more than one viatical settlement contract per year, and trusts created to hold viatical contracts are excepted from this definition.Providers are usually the viatical investment firms, progeny of the original venture capitalists, who buy large numbers of life policies and resell them to investors, called viatical settlement purchasers.
The viatical settlement sales agent is a person other than the provider who arranges the purchase, through a viatical settlement purchase agreement, of a life insurance policy or an interest in a life insurance policy. According to representatives at the Florida Department of Insurance, any person referring or soliciting the sale of a viatical investment who collects a fee or commission qualifies to be labeled as a sales agent.
The viatical settlement purchaser is defined as a person, other than a broker or provider, an accredited investor under Rule 501, Regulation D of the Securities Act Rules, or a qualified institutional buyer under Rule 144(a) of the 1933 Securities Act, who gives a sum of money as consideration for a life insurance policy for the purpose of deriving an economic benefit. This typically is the investor or ultimate purchaser.
The act defines a viatical settlement contract as one in which the provider pays compensation or value to the viator in an amount less than the expected death benefit of the subject insurance policy, and the viator in return assigns, transfers, sells, devises, or bequeaths ownership of all or a portion of the subject insurance policy to the provider. The contract can also include a loan secured primarily by a life insurance policy, or a loan secured by the cash value of the policy, excepting loans made by life insurers to insureds under the guidelines of the subject policy.
A viatical settlement purchase agreement is defined as a contract between a purchaser and a party other than the viator to purchase an interest in a life insurance policy. This is usually the investment contract between the purchaser and the provider.
The basic regulatory mechanism of the act is licensure. Brokers, providers, and sales agents are expressly subject to specific licensure requirements. Brokers must submit fingerprints, organizational documents, and sworn biographical statements, and must undergo a background check before receiving a license. Providers also must submit fingerprints and organizational documents and must undergo a background check as a prerequisite to licensure. Additionally, providers must meet a minimum trust deposit requirement of $100,000 with the Department of Insurance. Sales agents must hold valid life insurance agent licenses as defined in [sections] 626.051 of the Florida Insurance Code.
The act provides safeguards for the viators and purchasers who deal with brokers, providers, and sales agents. For example, brokers must disclose to viators the amount of the broker’s compensation and the method used in determining compensation. In addition, providers may not enter into contracts with viators whose policies provide accelerated death benefits in amounts and with prerequisites equal to those offered by the provider, unless the viator’s insurer denies a request to release the accelerated death benefit in writing, or does not respond to such a request within 30 days of receipt. Viators may also rescind a viatical settlement contract within 15 days after receipt of the settlement proceeds, contingent upon return of the proceeds.
The provider must inform the viator of the following: that there are alternatives to viatical settlements, including accelerated death benefits offered by the viator’s insurer; that proceeds of the settlement may be taxable; that proceeds of the settlement could be subject to the claims of creditors; and that the viator’s receipt of the settlement sum could adversely affect the viator’s eligibility for Medicaid or other government benefits.
Moreover, the act provides for the use of independent escrow agents for the simultaneous delivery of contract documents and settlement funds. This last protection reduces much of the viator’s transaction risk and results in orderly, real estate style settlement closings.
For purchasers, the act provides for the following mandatory disclosures to be made by providers and sales agents, among others: that the represented return of the investment is directly tied to the lifespan of one or more insureds; that the projected life span of the insureds is tied to the return, if a return is represented; that the investor shall be responsible for the payment of insurance premiums on the policy, late fees, surrender fees, and other costs, if required by the terms of the viatical contract; that the life expectancy and rate of return are only estimates and cannot be guaranteed; and that the viatical investment should not be considered a liquid purchase, since it is impossible to predict the exact timing of its maturity and the funds may not be available until the death of the insured. Furthermore, providers and sales agents are expressly prohibited from misrepresenting the nature of the viatical transaction, the expected return, or that the return is guaranteed by any government authority, which it is not.
Florida’s Viatical Settlement Act represents an attempt to regulate the viatical trade through strict licensure of brokers, providers, and sales agents, while mandating specific disclosures for the benefit of purchasers and viators. The act is modeled after the NAIC’s model act on viatical settlements and is thus uniform in many respects to viatical regulations in other states. The intended cumulative effect of the act appears to be a baseline standard of public education and protection, a goal somewhat similar to the policy underlying the regulation of investment securities.
This article appeared in the Florida Bar Journal.
If you have lost money on a viatical settlement, call a Securities Arbitration Lawyer for a free consultation on how to recover your losses. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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FINRA’s website has prepared an article stating, “Seniors Beware: What You Should Know About Life Settlements”
More and more seniors are hearing about opportunities to sell their existing life insurance for cash in transactions known as life settlements. A life settlement, or senior settlement, as they are sometimes called, 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.
Life settlements can be a valuable source of liquidity for people who would otherwise surrender their policies or allow them to lapse—or for people whose life insurance needs have changed. But they are not for everyone. Life settlements can have high transaction costs and unintended consequences. And even if you decide a life settlement is generally right for you, it can be hard to tell whether you are getting a fair price.
FINRA reminds us that if you are considering selling your life insurance policy to a third party, you can help protect yourself by familiarizing yourself with your existing policy so that you fully understand your options, becoming fully informed about life settlements, shopping around for the best offer, and dealing only with licensed buyers and brokers. We are issuing this Alert to highlight the questions you should ask and the factors to consider before entering into a life settlement.
You Should Know What Is a Life Settlement?
If you owned a life insurance policy that you no longer wanted or needed, you had two choices: surrender the policy for its cash value or allow it to lapse. Now, there is a third option: selling your policy (or the right to receive the death benefit) to an entity other than the insurance company that issued the policy in a transaction known as a life settlement.
Life settlement market emerged as an offshoot of the viatical settlement industry that developed in the 1980s as a source of liquidity for AIDS patients and other terminally ill policyholders with life expectancies of less than two years. Unlike viaticals, however, life settlements involve policyholders who are not terminally ill, but generally have a life expectancy of between two and ten years. Life settlements also tend to involve policies with higher net death benefits than viaticals.
The life settlement market has continued to expand rapidly in recent years. One recent report estimates that existing policies with a collective face value of $11.8 billion were sold by policyholders to investors in 2008.
Ask Yourself “How Do Life Settlements Work?”
The purchasers of life settlements, sometimes called life settlement companies or life settlement providers, generally are institutions that either hold the policies to maturity and collect the net death benefits or resell policies—or sell interests in multiple, bundled policies—to hedge funds or other investors. In exchange, you receive a lump sum payment. The amount you will receive in the secondary market depends on a range of factors, including your age, health and the terms and conditions of your policy—but it is generally more than the policy’s cash surrender value and less than the net death benefit.
At the time you sell your life insurance policy, whoever buys it is acquiring a financial interest in your death. In addition to paying you a lump sum for your policy, the buyer agrees to pay any additional premiums that might be required to support the cost of the policy for as long as you live. In exchange, the buyer will receive the death benefit when you die.
The Factors to Consider When Deciding to Sell Your Life Insurance Policy
Life settlements have proven profitable not only for institutional investors that purchase policies, but also for the providers and brokers who handle these transactions. As a result, competition among life settlements providers for individuals seeking to sell or otherwise terminate their life insurance policies has become increasingly intense. Because the life settlement industry is relatively new and may target seniors who may be in poor health, it can be prone to aggressive sales tactics and abuse.
It does not mean that you should never consider a life settlement. A life settlement might make sense for you if you no longer want or need your current policy—or if you can no longer afford the expense of paying insurance premiums and are willing to give up or replace the coverage. Even then, however, you should proceed with caution. Here are some of the key factors you should 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. If your goal is to retain coverage but lower the premiums you pay or otherwise obtain different features, you might want to consider options such as reducing your existing amount of policy coverage or making a “1035 Exchange.”
|1035 ExchangesIf you’re thinking of switching from one life insurance policy to another, you should consider whether a “1035 Exchange” would be more beneficial than a life settlement. Depending on your circumstances, if you opt for a life settlement, you may have to pay taxes if the cash surrender value of your policy—or the amount of a life settlement—exceeds the premiums you’ve paid.
The Internal Revenue Service allows you to exchange an insurance policy that you own for a new life insurance policy insuring the same person without paying tax on the investment gains earned on your original contract—which could be a substantial benefit. Because this is governed by Section 1035 of the Internal Revenue Code, these are called “1035 Exchanges.” But there are other factors you should consider when deciding whether to exchange your policy, including potential loss of death benefits. For more information and a list of questions to ask, see FINRA’s Investor Alert entitled Should You Exchange Your Life Insurance Policy?
- 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. Check with the company that issued your policy before leaping into a life settlement. You may still decide that a life settlement is the best alternative for you, but you should be aware of all of your options before making up your mind.
- 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. This can mean directly contacting multiple life settlement companies, using a licensed life settlement broker who will shop your policy around on your behalf, or contacting your broker or other financial services provider.
- 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. You may want to consult your attorney, accountant, or other legal or financial professional.
- 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.
Can I Protect Myself?
If you decide to go forward with a life settlement, here are some questions you should be sure to ask.
Is the life settlement broker or provider licensed in my state? A growing number of states regulate life settlement companies and life settlement brokers to some degree, and may require that they be licensed. Be sure to ask your state insurance commissioner whether the life settlement company or broker you are dealing with is properly licensed—and whether either has a record of complaints. If you are working with a securities broker, FINRA BrokerCheck should be your first resource to learn about his or her professional background, registration/license status and disciplinary history.
- What will happen to my policy? Ask what the life settlement company that is buying your policy will do with it. Will they hold it themselves? Sell it individually? Or package it with other policies and sell interests in the package to other investors? The ultimate buyer of your policy will become responsible for paying the premiums and will collect the death benefit when you die—and, as noted below, any interim and ultimate buyers of your policy will also have access to a great deal of personal information about you, including your health status.
- 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. You may also have to agree to provide periodic updates about your health. Once the buyer obtains that information, it may be shared with other parties, including lenders or third party investors.
- How can I protect my privacy? Before accepting any offer from a life settlement company, you should carefully read the application, and make sure that the company has procedures in place to protect the confidentiality of your information. If it will be sold, ask to whom, and whether the end buyers will have access to your personal information. If you use a life settlement broker, find out the names of the life settlement companies from whom the broker solicits bids, and ask about the privacy policies of all parties or potential parties to the transaction. In many cases, state regulations govern the handling of confidential information. Contact your state insurance commissioner to find out what regulations apply.
- 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. If you are approached by someone soliciting you to sell your life insurance policy, make sure you understand that person’s role in the transaction: is he or she a life settlement broker who represents you, or is the person affiliated with a particular life settlement company? If the answer is the latter, the person may only obtain an offer from that company, making it hard for you to know whether you are being offered a competitive price for your policy.
- 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%. Ask your broker or other financial adviser what they are being compensated for their role in the transaction and how their compensation is being calculated. Also inquire about what other parties are receiving commissions. If someone recommends a particular life settlement to you, find out what they are being paid, and by whom.
- What are the tax consequences? The lump sum payment you receive in exchange for your life insurance policy can be taxable, depending on your circumstances. Before entering into a life settlement, check with a tax professional about the tax implications of any transaction you are considering.
- 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. If you do accept an offer and later reconsider, be aware that some states have laws that allow you to change your mind within a certain amount of time.
- Is the life settlement in my interest or my investment professional’s? At least one marketing brochure targeted at investment professionals not only touts the potential commissions from life settlements, but also emphasizes that additional revenues can be generated from the seller’s purchase of other investment products using the proceeds from the life settlement. Citing industry statistics, the brochure notes that almost half of all life settlement transactions result in the purchase of new life insurance. In other words, your investment professional stands to make two commissions off of a life settlement transaction. And you may end up replacing a perfectly good policy with a costly new one.
- 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.
Read these Reminders:
Life settlements may make sense for people who no longer need or want their insurance policies, and would otherwise surrender their policies or allow them to lapse. But even then, you should proceed with caution. Consult with your broker or other financial services provider, and make sure that you:
- are dealing with properly licensed entities;
- are aware of the confidentiality policies of the parties involved;
- are getting a fair price; and
- understand the tax and other implications of the transaction.
FINRA Tells US Where to Turn for Help and Additional Resources
Life settlements can involve almost any kind of insurance policy, including variable policies. However, because only variable insurance products are securities, FINRA only has jurisdiction over life settlements involving variable policies.
If you have questions or wish to file a complaint about a life settlement, be sure to call or write your state insurance commissioner. If your complaint concerns a variable life insurance policy, you may also file a complaint with FINRA.
For more information, please see the following materials:
- Notice to Members 09-42 (which discusses regulatory concerns about member firm activity involving variable life settlement transactions)
- Notice to Members 06-38 (which discusses concerns about, and member firm obligations in the context of, sales of existing variable life insurance policies to third parties)
- Selling Your Life Insurance Policy: Understanding Viatical Settlements (NAIC alert)
- Viatical Settlements: Buying Viaticals as Investments (NAIC alert)
- NASAA Alert Concerning Viatical Settlements
- Should You Exchange Your Life Insurance Policy? (FINRA alert)
- FINRA Investor Podcast, Seniors Beware: What You Should Know About Life Settlements
Glossary of Terms: Life Settlements
Accelerated Death Benefits
Also known as “living benefits,” accelerated death benefits provide payments to policy holders who have a long-term, catastrophic, or terminal illness-payments that ordinarily would not be available prior to the policy holder’s death. Rules concerning accelerated death benefits vary from company to company and from policy to policy. In some cases, depending on the term of the policy or contract, the beneficiaries of the policy may be entitled to a reduced death benefit.
Cash Surrender Value
The cash surrender value of a life insurance policy is the amount you can collect if you cancel (or “surrender”) the policy before it matures or before you die. The amount is typically based on the cash you’ve built up in the policy over time (your tax-deferred savings) minus any surrender charges or outstanding loan balances.
Lapse refers to the termination of an insurance policy when an individual fails to pay his or her premiums on time. If you allow a policy to lapse, you typically cannot collect any cash surrender value that would otherwise be available.
Net Death Benefit
A death benefit is the amount an insurance company pays to a policy holder’s beneficiary when the policy holder dies. Not all life insurance policies or annuity contracts provide for this sort of benefit, and not all death benefits are calculated the same way. The net death benefit is the amount specified in the insurance policy or annuity contract, minus any unpaid premiums that are due and outstanding loan balances or other withdrawals. In the case of variable life insurance or variable annuities, investment gains and losses can impact the amount of the death benefit.
This very valuable information comes from the FINRA website.
Do you feel you were alledgedly scammed in the Life Insurance Market by your broker? You may have legal rights to recover your money from the broker or brokerage firm that sold you your insurance. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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Eleventh Circuit Court of Appeals Rules in Favor of the Florida Office of Insurance Regulation Re: Viaticals
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A viatical settlement, also referred to as a life settlement, is the sale of a life insurance policy by the policy owner before the policy matures. Such a sale, at a price discounted from the face amount of the policy but usually in excess of the premiums paid or current cash surrender value, provides the seller an immediate cash settlement. Generally, viatical settlements involve insured individuals with a shorter life expectancy. This is a practical way to pay extremely high health insurance premiums that severely ill people with short life expectancy face. A life settlement is a similar transaction but involves insureds with longer life expectancies. From the viewpoint of the investor, purchasing a viatical settlement is similar to buying a zero coupon bond with an uncertain maturity date. The return depends on the seller’s life expectancy and when he or she dies. The viatical settlements grew in popularity in the United States in the late 1980s, when the AIDS epidemic peaked. Viatical settlements offered a way to extract value from the policy while the policyholder was still alive. At that time, the AIDS mortality rate was very high, and life expectancy after diagnosis was typically short. The investors were reasonably sure that they would collect in a relatively short time. This combination of events caused an increase in viatical settlements as both investors and viators saw an opportunity for mutual benefit. Viatical settlements developed a bad reputation in the investing community. The companies that purchased them from policy holders typically resold them to individual investors. Salespeople were paid large commissions to push the settlements, which were not conventional investments and which were misunderstood by many investors. The government regulatory agencies had little experience and few regulations dealing with viatical settlements, and the industry attracted some unscrupulous dealers.
Attorney Lars Soreide, a Florida based securities lawyer, said recently, “It is of utmost importance that you do your research before investing in viaticals. They can be very risky investments and end up costing you, the investor, a lot of money.” Soreide Law Group represents clients who are victims of investment fraud.
One of the most infamous viaticals cases involved the Mutual Benefits company headed by Peter Lombardi in Florida which had over 28,000 investors and had focused in the paying HIV clients. In 2003, the Securities Exchange Commission closed the firm saying it was involved in a $1 billion Ponzi scheme. Lombardi is now serving a 20-year prison sentence. Often viaticals can end up costing investors a lot of money. The North American Securities Administrators Association (NASAA) calls viaticals one of the top ten investment scams. According to Joseph Borg, former president of the North NASAA and director of the Alabama Securities Commission. Securities regulators are “concerned that the inherent risk of viatical investments – gambling on when someone will die – aren’t being adequately disclosed, and second, many investors have been outright defrauded by some viatical companies or their sales agents.”
These are a few of the ways people can lose money: · Improved medical care, the ill or older person may live longer than expected. As the new owner of the policy, you have to pay the premiums to keep the policy in force. You tie up your money longer and your profit declines the longer the person lives. · Occasionally, the insured person is not ill at all, so the investor will need to make insurance payments — sometimes for years — or the investment is lost. · The insured person may have purchased the life insurance through fraud and the insurance company will refuse to pay the settlement. · The insurance company or viatical settlement company may go out of business — along with your invested money. · Some brokers have sold the same policy to multiple investors. · The insured’s heirs may challenge changes made to the policy.
Protect Yourself It is important to learn all you can about viaticals before you invest. Attorney Lars Soreide, reminds clients investing in viaticals, ”Before investing in viaticals make sure you ask plenty of questions, such as: Is there a ‘contestability clause?’ Who is responsible for making the premium payment? Can it be contested by the family? Does the viator actually exist? Have they sold this policy to more than one party? Did you check the guarantees? Is it a term policy that could expire after a certain point? These are just a few of the questions an investor needs to ask.” If you feel you have been defrauded in a viatical investment, contact Soreide Law Group and speak to an attorney. Failure to research thoroughly the investment often results in financial disaster.
More questions to ask include: · Is this investment right for you based on age, financial status and other personal circumstances? If the viator lives longer than expected, your investment dollars will be tied up for a longer period of time than expected, and you will be paying the policy premiums. · Is the viatical investment considered to be securities in your state? Check with your state securities regulator to see if it should be–and is registered, and if the broker is licensed. In some states, viaticals are regulated as insurance products; in other states they are not regulated at all. · What control, if any, do you retain over your investment? · What financial information will the provider disclose about its history? If the viatical settlement provider and/or the insurance company goes bankrupt, you could lose or tie up your investment dollars indefinitely.
If you feel you’ve been defrauded by a viatical sale or settlement, contact Soreide Law Group. For more information about our services please visit: www.stockmarketlawsuit.com or call and speak to an attorney at: (888) 760-6552.
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