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Does this suit you? (Part 6 of 11)
Thursday November 01, 2007 12:00AM | Click here to visit original article.
This leads us to the most significant problem involving life settlements, which is suitability. Usually, the issue of suitability relates to the agent selling a senior something which they don't need. Here, the suitability issues relates to the agent incorrectly advising the senior to sell something that the senior should be holding. In many ways, it really is no different than if the senior held a Certificate of Deposit that would pay $10 million in ten years, and the agent came and convinced them to unload the CD now for only $1 million. What the agent might argue is that the senior was cash-tight, and needed the $1 million now for cancer therapy. In that very limited case, the agent's advice might be correct. But how about if the senior didn't even need the $1 million because the senior had other cash available? In the latter case, the senior would not be deemed to be suitable for the sale of the CD. In fact, at a speech given May 25th at the NASD Spring Securities Conference, Mary Schapiro, the Vice Chairman and President of the NASD, stated that the NASD considers life settlements to be "securities, subject to firm supervision." If, as the NASD thinks, life settlements are securities then that raises a wide variety of issues, including suitability and whether the life settlement sold must be accompanied by an offering memorandum or prospectus just like any other security. Certainly, all of this opens the door for securities litigation whenever a life settlement is sold - and perhaps most likely against the agent who acts as a de facto securities broker in encouraging the senior to sell. In some states, such as California, one must also wonder whether so-called "senior abuse" statutes might come into play where seniors are being encouraged to sell their policies when they have the ability to continue to fund them. What goes on in a lot of these cases is that the insurance agent who is encouraging the senior to sell his life insurance policy by way of a life settlement is then also encouraging the senior to "replace" their life insurance needs with a new policy. While this puts the insurance agent into a wonderful double commission situation where they are making money both selling the old policy and buying the new one, it usually makes little sense. The reason is that the insurance costs of the new policy will almost always be higher than that of the old policy, simply because the senior is now older and more importantly, much less healthy than when he bought the original policy, so he will be in a higher "risk" class. In other words, the insurance agent is telling their senior to sell a perfectly good policy and replace it with a crappy one. This is usually bad advice, since if the senior was really smart he would put enough money into his old policy to keep it alive, and then use whatever remaining excess liquidity that he has to buy as much more life insurance as he can afford and the underwriters will let him buy. A must-read recent study by Deloitte Consulting LLP and the University of Connecticut discuss the typical higher insurance costs of the replacement policy, see The Life Settlements Market: An Actuarial Perspective on Consumer Economic Value, http://www.quatloos.com /uconn_deloitte_life_settlements.pdf This study concluded in part that at least half of the policy value will be lost by the super-high transaction costs, which exceed by many multiples the transaction cost of selling any other financial asset. ---Source: http://www.quatloos.com/life_settlement-life_settlements.htm |
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