Yesterday, we wrote that Texas-based Life Partners Holdings Inc. moved to reduce some of rates of return it had promoted for its life settlement investments. The new approach involves targeting 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 change, said Investment News, could lead to lawsuits against Life Partners.
A life settlement is sometimes called a Viatical Settlement, and is the sale of an existing life insurance policy to an investor who will pay required premiums on the policy, collecting its proceeds once the insured dies. 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.
According to attorneys familiar with the case, said Investment News, the firm’s choice to change its advertised rate of return is a “red flag” that something isn’t right. In addition to more regulatory scrutiny, Life Partners is likely to become a target of lawsuits which could accuse the firm misrepresentation and omission for the change in return.
The firm just acknowledged that it is the subject of a Securities and Exchange Commission (SEC) probe, which only adds increased interest into its activities, said The Wall Street Journal previously.
The Journal has 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. The SEC probe was prompted, in part, by a series of articles by the Journal that pointed these issues, said Investment News.
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.
Life Settlement sales are legal; however, the North American Securities Administrators Association says such products are prone to life settlements fraud and other fraud schemes and, in 2009, Life Settlements made it to the association’s list of the top 10 investor traps.