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What About Settlement Buyers?

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One witness who appeared Wednesday at a life settlement hearing focused on issues of concern to life settlement investors.

Most of the witness at the hearing, which was organized by the Senate Special Committee on Aging, focused on topics involving protection of insureds, such as fee disclosures and the dangers of participating in stranger-originated life insurance transactions.

Fred Joseph, the Colorado securities commission and president of the North American Securities Administrators Association Inc., Washington, talked instead about the risks facing unsophisticated individuals who invest in life settlement programs.

One problem plaguing the life settlement industry has been Ponzi schemes, set up in such a way that the organizers buy no settled policies, Joseph said, according to the written version of his testimony.

Other dangers include use of “fraudulent life expectancy evaluations prepared by captive physicians, inadequate premium reserves that increase investor costs, and false promises of large profits with minimal risk,” Joseph said.

In other cases, providers have concealed information about material factors such as the fact that rates of return can vary significantly, depending upon the accuracy of life expectancy calculations, Joseph said.

“If viators do survive beyond their life expectancies, investors may be forced to pay premiums to avoid lapse of policies and loss of any recovery,” Joseph said. “Investors receive no payments whatsoever until viators pass away and claims for death benefits are properly filed and paid.”

Further, Joseph said, the investments are illiquid, because the secondary life market has not developed a secondary market of its own.

“Finally,” Joseph said, “viatical companies and their principals have often concealed disciplinary histories replete with investor complaints, enforcement actions, and even criminal prosecutions.”

One way to alleviate many of the problems is to regulate viatical investments as securities, Joseph said.

“Promoters must register their securities so that material information about an offering reaches prospective investors before they part with their money,” Joseph said. “Those who sell securities must submit to testing, licensing, and background checks to help ensure they have the knowledge and fitness to accept investor funds and render investment advice…. Finally, the securities laws give regulators the authority to seek important remedial measures, including injunctions, disgorgement, and restitution.”

A copy of the written version of Joseph’s testimony is available here.


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