Life Partners Holdings, Inc., a company that has been a pioneer in the field of life insurance securitization, is under investigation by the SEC, according to individuals with whom the agency has spoken.
According to a Wall Street Journal report on Thursday, Life Holdings has reputedly been more than a little optimistic about the life spans of the insureds whose policies are contained in its investments, and the SEC is analyzing its methods of determining survival projections.
Investors, ghoulish as it may sound, look for policies on people who are not expected to live very long; the shorter their life spans, the more a share in the investment is worth and the faster an investor reaps a share of the death benefit. Life Holdings has routinely provided estimates through a single Nevada physician, Donald T. Cassidy, whose evaluations of insureds' physical well-being are consistently off by a substantial margin, according to allegations.
If an insured survives for several years past his projected life span as provided by Cassidy, investors in his life insurance policy not only fail to gain a quick return on their investment but also must often pay additional premiums to keep the policy in force until at last the insured passes away.
Life Partners did not respond to a request by AdvisorOne for comment.
The Journal report related complaints by an investor, Charles A. Snell, who said he was personally assured by Brian Pardo, Life Partners' chief executive, that the company's life expectancy projections were highly accurate—"in th[e] ballpark" of 70%-80%.
In fact, Snell, who has invested in five policies through the company and has yet to see a return, says that none of the five individuals have died, and he is now on the hook for an additional $20,000 in life insurance premiums. The Journal found in an earlier article that Cassidy's methods were questioned by others in the life expectancy field, and reported on Thursday that, for policies sold from 2002 through 2005, the insureds outlived the estimates approximately 90% of the time.
Repercussions from the investigation by the SEC remain to be seen. Life Partners won a federal appeals court ruling 15 years ago that its transactions regarding life insurance policies were not subject to federal securities laws. However, in 2008 Colorado brought a fraud suit that was settled with no finding of fraud; as a result, Life Partners agreed to repurchase policies from many Colorado investors.
For more in-depth information, see the upcoming February issue of Investment Advisor magazine.
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