April 30, 2009 – Senior citizens buying life
insurance policies and then turning them over to investors who paid them
a profit to buy the insurance, and life insurances policies bought from
seniors and then bundled as investments are some of the problems in the
“life settlement market” examined yesterday in a Senate hearing.
The hearing of the Senate Special Committee on
Aging explored the booming life settlement market, an industry that has
doubled in size since 2006 to a $12 billion market, and which analysts
expect will exceed $160 billion within a few decades.
A life settlement is a financial arrangement in
which a person – usually an older person - sells their life insurance
policy to investors, who continue to pay the policy premiums and collect
the payout upon the seller’s death.
A committee investigation, which was presented at
the hearing, has uncovered unintended consequences for consumers, sales
and marketing abuses, and insurance fraud, all of which are exacerbated
by the high commissions earned by life settlement brokers.
“Life settlements can be a worthy alternative for
seniors who are considering the sale of their life insurance policy, and
offer a higher payment than the cash surrender value offered by the
insurance company. But selling one’s life insurance policy is a complex
transaction that may be fraught with possible hidden pitfalls,” said
Sen. Herb Kohl (D-WI), committee chairman.
“As states struggle to increase regulations and
consumer protections, it is crucial that the federal role is made
clear.”
The hearing was entitled, “Betting on Death in the
Life Settlement Market – What’s At Stake For Seniors?”
“In today’s turbulent economic environment, we want
to preserve and protect seniors’ financial assets and resale options in
all financial markets,” said Ranking Member Sen. Mel Martinez (R-FL).
“Seniors should have comfort that they are receiving the best value for
their assets and they deserve full accountability and transparency when
engaging in life settlement policy transactions.”
Martinez noted our seniors and their beneficiaries
need strong guidance from the Internal Revenue Service and appropriate
clarification on all tax liabilities associated with life settlements
policies.
“In today’s uncertain economy, many of our nation’s
seniors are living with fixed financial budgets,” Martinez said. “We
need to ensure that no matter who prepares their tax returns, seniors
and their beneficiaries will be treated consistently and fairly by the
tax code, and that they pay the appropriate tax due without the current
ambiguities.”
Investors Find Morbid Niche In Surrendered Life
Insurance
Lawmakers Review Practice of Betting on
Policyholders' Deaths
While companies across the financial services
industry were taking a beating last year, a firm in Waco, Tex., with a
less than cheery way of making money was boosting its profit by 46
percent.
Its niche: helping investors place bets on when
people will die.
The Committee heard from three state regulators
about the regulations to combat some of the more questionable practices
of the life settlement industry. State regulators have also been
working to put a stop to insurance fraud in the form of
stranger-originated life insurance, or “STOLI,” wherein brokers convince
seniors to purchase life insurance, with the agreement that after a
period of time, the policy will be sold to the broker.
State witnesses included Mary Beth Senkewicz,
Florida’s Deputy Commissioner of Life and Health Insurance; Michael
McRaith, Director of the Insurance Division of the Illinois Department
of Financial and Professional Regulation; and Fred Joseph, Colorado
Securities Commissioner and president of the North American Securities
Administrators Association (NASAA).
In the midst of a financial crisis that has been
blamed on a lack of oversight and regulation, the Committee examined how
life settlements are being bundled and used as potentially risky
investments by some of America’s largest investment companies.
Witnesses testified about the risks associated with
purchasing investments backed by life settlements, and explained why
they are not generally considered suitable for non-institutional
investors.
In a reply, Treasury Secretary Timothy Geithner
stated that the agency will soon publish tax guidance for people who
sell their policies and the investors who purchase them.
Mary Schapiro, Chairwoman of the SEC, also
responded, clarifying the SEC’s jurisdiction over most aspects of life
settlement transactions, and assuring Chairman Kohl that the agency
would look into the regulation of life settlement brokers.
The hearing’s second panel included representatives
from the life insurance and life settlement industries, including James
Avery, Jr. on behalf of the American Council of Life Insurers (ACLI);
Scott Peden, president of Life Partners, Inc., based in Waco, Texas; and
Michael Freedman, senior vice president of government affairs for
Coventry, the largest life settlement provider, based in Fort
Washington, Pennsylvania.
●
Stephan Leimberg, CEO, Leimberg Information Services, Inc.,
Havertown, PA
●
Mary Beth Senkewicz, Deputy Commissioner, Life and Health Insurance,
Florida Office of Insurance Regulation, Tallahassee, FL
●
Michael McRaith, Director, Division of Insurance, Illinois
Department of Financial and Professional Regulation, Chicago, IL
●
Fred Joseph, Commissioner, Division of Securities, Colorado
Department of Regulatory Agencies, on behalf of North American
Securities Administrators Association, Denver, CO
●
James Avery, Jr., President, Individual Life for Prudential
Financial, on behalf of American Council of Life Insurers, Newark, NJ
●
Scott Peden, President, Life Partners, Inc., Waco, TX
●
Michael Freedman, Senior Vice President, Government Affairs,
Coventry, Fort Washington, PA
For Committee investigation findings and IRS and
SEC responses,
click here (pdf)
For Chairman Kohl’s letter to the IRS,
click here (pdf)
For Chairman Kohl’s letter to the SEC,
click here (pdf)
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