We’ve explored life settlements and their securitization in these pages before, covering everything from legal issues to emotional and medical ones. But there’s another facet of this business raising its ugly head in the press these days: ethics.
While the business of life settlement securitization is most likely here to stay, there is the potential for abuse, whether it’s talking a senior citizen into taking out a life insurance policy to resell it (stranger-originated life insurance, also known as STOLI); whether an investor is paying a fair price for an investment in such a security; or whether the securitization itself is adequately regulated.
This time, however, the issue does not address itself to those who sell their life insurance policies (also known as “settlors” in life settlement securitization terminology), but instead to the firms that collect and securitize them for resale to investors—or, rather, one firm: Life Partners Holdings Inc. The Wall Street Journal, on Dec. 21, ran a piece that questioned the validity of the estimates obtained by Life Partners of settlors’ life expectancy that the company used when valuing the securitized policies it sold.
The questions, basically, are three: whether the company is using the best method of obtaining life expectancy estimates; whether risk disclosure and claims of returns to its investors are adequate and reasonable; and whether investors are paying more than reasonable costs for their investments.
Underestimating Expectancy
It seems that, according to a WSJ investigation, the company has made a habit of underestimating how long its securitized settlors would live. The authors of the article pointed out that independent life-expectancy firms within the industry gave higher estimates of life expectancies to settlors, including some specific ones from Life Partners’ securities. The article also explained that if a settlor survived long enough past the estimated life expectancy date, investors might not just be left hanging for a return on their investments, they would also have to kick in to pay additional premiums to keep the policies in which they’d invested in force. When they invest in these policies, the money they pay to Life Partners is partly for fees, partly in escrow to cover possible additional premiums, and, of course, partly for the purchase price of the policy itself. If the escrow funds are exhausted because a settlor has outlived the estimate upon which the escrow was based, investors have to pay more, thus reducing their return, or run the risk of the policy’s cancellation.