Life Partners Holdings Inc., a Texas company that sells investments known as Life Settlements, recently acknowledged that it is the subject of a Securities and Exchange Commission (SEC) probe Now, in the midst of the probe, as well growing interest into its activities, said The Wall Street Journal, Life Partners Holdings Inc. is changing some of its business practices.
A Life Settlement, also sometimes called a Viatical Settlement, is the sale of an existing life insurance policy to an investor, who will pay required premiums on the policy, then collect its proceeds once the insured dies.
As we’ve previously mentioned, since its incorporation in 1991, Life Partners has completed over 127,000 transactions for its worldwide client base of over 27,000 high net worth individuals and institutions in connection with the purchase of over 6,400 policies totaling approximately $2.8 billion in face value.
Its new approach, which was reviewed by the Journal via an announcement the firm emailed to its agents it will target its clients’ annual returns of seven percent over seven years, instead of the currently targeted 12-to-14 percent over a shorter timeframe of four-to-six years. The prior approach was touted only last year, said the Journal.
The firm told its agents that it conducted a review “in light of the issues raised by the Wall Street Journal,” which noted that it published the Page One article in December. The recent Journal investigation reported a significant portion of insured individuals were outliving Life Partners ‘life expectancy estimates, a factor that would cut investors’ returns. Life Partners’ generally boasted expected returns of 10-to-15 percent on Life Settlements.
While the sale of Life Settlements is perfectly legal, the North American Securities Administrators Association says such products are prone to fraud such as Ponzi schemes, phony life expectancy evaluations, inadequate premium reserves that increase investor costs, and false promises of large profits with minimal risk. In 2009, Life Settlements made it to the association’s list of the top 10 investor traps.
Life Partners said in its email to agents that how it pays premiums to insurance companies will also be changing and that insurers will be paid the minimum yearly amount to keep policies active, said the Journal. In other words, up-front investor payments of policy purchases and premium payments would be further “stretched” to seven years, explained the Journal, a problem for life insurers who will experience increased challenges in making profits. The move is meant to calm investor concerns.
The Journal previously reported that, among other things, Life Partners Holdings receives life expectancy estimates “from a doctor in Reno, Nevada, who has testified for a court case that he never checks the accuracy of his prior predictions.” And, it seems life expectancy estimates provided to investors on Life Partners’ Life Settlements are very often inaccurate. For example, In 2002, Life Partners put a life expectancy of two years or less on the insured person in a third of the 297 policies it sold, and four years or less on all but a handful. If the projections were accurate, almost all of those policies should have “matured,” with the insured dead, by the end of 2009, but, instead, the insured had outlived the estimate in 283 of the 297 policies, according to the Journal.
According to a report in The New York Times, the SEC Life Partners probe is focused on how it estimated life expectancies of individuals insured by the policies it sold investors. A life expectancy estimate plays a key role in determining the value of such an investment. The shorter an insured’s life span is expected to be, the more a firm like Life Partners generally can charge investors for that policy. If the insured lives longer than is estimated, the payout is delayed, and investors must keep paying premiums as the person lives on. Clearly, Life Settlements Fraud concerns are a factor in this probe.