By Robert Powell
MarketWatch (MCT)
BOSTON - Of all the products ever engineered by the financial-services industry for sale to unsuspecting seniors and others, none seem quite as insidious as life settlements.
Life settlements are schemes in which you sell your life-insurance policy to a third party for some cents on the dollar, usually more than the policy's cash value but less than the death benefit. They're appealing to people who are strapped for cash and need the money. Or you might do it because you're unable to keep paying the policy premium. Or because an insurance salesman has convinced you this is a good deal.
But before you let someone you don't know become the owner and beneficiary of your insurance policy, consider the following recent goings-on in the industry.
In July, the Financial Industry Regulatory Authority "reminded" brokerage firms that they must comply with the rules governing variable life policy sales when participating in the life-settlement business. Now what would possess the agency that regulates the brokerage industry to issue such a reminder? Is it because salesmen are following the rules to a T? Highly unlikely, I say.
In fact, in Regulatory Notice 09-42, Finra said it is "concerned about variable life settlements because they involve materially different factors and raise materially different issues than more widely held securities such as stocks or bonds." What's more, Finra said firms' marketing of variable life settlements is directed almost exclusively toward senior investors who, concerned about current economic conditions and retirement, may consider selling their variable life insurance policies without fully appreciating the risks and costs of variable life settlements.
Meanwhile, more states are putting in place laws and regulations designed to protect seniors from unscrupulous life-settlement salesmen. Some, though not all and not nearly enough, states have put in place bonding requirements, licensing provisions, restrictions on policy use in the first five years, and commission constraints, among other actions. Vermont, for instance, will later this year prohibit brokers from earning more than 2 percent of the amount paid by a life-settlement company to the policy owner, according to the Life Insurance Settlement Association, the lobbying group for the life settlement business.
Not surprisingly, about half of the life-settlement firms have stopped doing business in those states that have beefed up their laws and regulations. If what these firms did was so right, why would they stop selling their products in these states?
And then there are the PR campaigns. There's one that purports to educate consumers about life settlements and another aims to recruit salesmen. First the latter: Here's a recent post I chanced upon on one of the social network sites: "Life settlements are a great way to generate capital during these tough economic times," Ellis Largent of Opulen Capital wrote. "Feel free to contact me to see if a life settlement is right for your clients." OK, we'll get right on that one.
And then there's the consumer-focused campaign: "In an effort to better educate seniors on the benefits and important considerations of selling their unwanted or unneeded life-insurance policies through a life-settlement transaction, LifeBack, a direct-to-consumer life-settlement program to launch later this year, has introduced a new guidebook to help consumers objectively evaluate the appropriateness of a life settlement for their retirement needs." The book is called "Is a Life Settlement Right for You?"
If you decide to read the booklet, be sure to read Finra's investor alert on the subject too. You want both sides of the story, eh?
To be sure, there some good stuff to be said about life settlements. Apparently, they make for a good investment. "As investors seek safer, shorter windows for returns, life-settlement securitizations are becoming increasingly popular," according to a Reuters report. The securities, which are backed by life- insurance policies and sold on the asset-backed market, are in demand because they are "solely tied to mortality, a natural-occurring phenomenon," Jan Buckler, an analyst at Dominion Bond Rating Service, is quoted as saying in the report. And Ron D'Vari, chief executive of NewOak Capital is quoted as saying: "Life-settlement securitizations should be attractive to investors as they are uncorrelated to everything else as far as the underlying expected cash flows are concerned."
I guess, but it sure doesn't seem quite right now. I mean, what's next - life-settlement securitization on our pets?
(c) 2009, MarketWatch.com Inc.
Distributed by McClatchy-Tribune Information Services.
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