Despite their growing popularity, ghoulish ‘life settlements’ are ripe for fraud
WASHINGTON - Even in the best of times, some investors are always looking for that golden, seemingly risk-free investment that will net them fabulous returns.
But the further afield they look, the more likely they are to be taken advantage of. In hard times, the chances of getting taken multiply a hundredfold.
The latest growing exotic investment option is in what are called “life settlements’’ or “senior settlements.’’ They’re ghoulish products by any name. In a life settlement, a life insurance policy holder sells the policy to a third party for less than its full face value.
Although they can be marketed and sold legally, the products are so complex and opaque they are prone to fraud, including: Ponzi schemes; phony life expectancy evaluations; inadequate premium reserves that increase investor costs; and false promises of large profits with minimal risk, according to the North American Securities Administrators Association, which represents state securities regulators.
Life settlements, which have seen significant growth, made it to the association’s most recent list of the top 10 investor traps.
These products started to get public attention when the terminally ill, most notably AIDS patients, started to sell their life insurance policies to raise cash for medical and living expenses. Now, policy sellers are mostly the elderly, typically age 65 to 85 with a life expectancy of 144 months or less, says Stephan R. Leimberg, the creator and editor of “Tools and Techniques of Life Settlement Planning.’’
From the investor side, you make money by collecting on the policy’s death benefit. How much is earned depends upon the life expectancy of the insured. The sooner the seller dies, the more money the investment makes.
The life settlement industry was estimated at $5.5 billion in 2005. In 2008, it had grown to $11.8 billion, according to the Financial Industry Regulatory Authority.
Wall Street is trying to figure out a way to package life insurance policies for sale as bonds. The authority discussed life settlement securitizations in its July regulatory notice, saying that sales of investment products that are derivative of or based on life settlements and related products are likely to increase.
Leimberg, who is advocating for tough regulation of the industry, is right when he says this industry is here to stay. “If you could put this back in the box, that would be wonderful,’’ he said.
Life settlements are just another dreadful financial concoction with some of the same pitfalls as the subprime mortgage-backed securities that helped take our economy down. With the latter, unrealistic bets were made on other people’s mortgages. Now bets are being placed on other people’s lives.
Michelle Singletary is a columnist for The Washington Post. She can be reached at singletarym@washpost.com. 
