Invested in a life settlement? Know the law.

by Jay Pate

It is crucial that individuals who have invested their money in life settlements agreements are aware of the laws regulating these securities. State and federal laws regarding life settlements have been designed to protect investors from fraud and other abuses on the part of the companies that sell these policies.

A life settlement is a transaction in which an investor acquires from the owner of a life insurance policy the right to receive the death benefit payable for the life insurance policy. A life settlement might be structured in a variety of ways, such as: (a) a sale of the benefit in a life insurance policy for value; (b) a loan or other lending transaction, secured by one or more life insurance policies; (c) certain premium finance loans made for a life insurance policy on or before the date of issuance of the life insurance policy; or (d) the transfer for compensation or value of the interest in a trust or other entity that owns a life insurance policy if the trust or other entity was formed for the principal purpose of acquiring one or more life insurance contracts.

The life settlement industry is regulated by a variety of authorities, including the state and the federal government. One purpose of life settlement regulations is to protect the public by preventing, detecting and combating fraud within the life settlement industry. Wise regulations promote full transparency of the life settlement industry and all transactions of life insurance policies in the so-called “secondary markets.”

Both the National Association of Insurance Commissioners (“NAIC”) and the National Conference of Insurance Legislators (“NCOIL”) have adopted model state statutes addressing life settlements. These model acts include provisions addressing licensing of life settlement brokers and providers, disclosure to policy owners in connection with entering into life settlement contracts, regulators’ examination and enforcement powers, and deterrence of “stranger-originated life insurance” transactions.

The model acts have some provisions in common. Both model acts:

  • require that life settlement brokers and providers operating within a state be licensed by the state insurance regulator;
  • require that life settlement contract forms and disclosure forms be filed with and approved by the state insurance regulator;
  • contain reporting requirements applicable to life settlement providers and provisions to protect the privacy of the insured;
  • set forth certain disclosures that a life settlement provider or broker must make to the owner of a life insurance policy in connection with entering into a life settlement contract; and
  • require that a life settlement broker provide the owner of a policy with a description of all offers relating to a proposed life settlement contract, as well as the amount of the broker’s compensation.

Both model acts have provisions designed to deter stranger-originated life insurance (“STOLI”). STOLI is a transaction in which a person is induced to purchase a life insurance policy that he likely would not otherwise have purchased. The individual applies for the policy understanding that he will turn over control of the policy to the investor. The NAIC model act imposes a five-year waiting period between the time of issuance of a life insurance policy and the time of entering into a life settlement contract. The NCOIL model act actually contains a definition of STOLI, and specifically provides that STOLI is a prohibited practice and a “fraudulent life settlement act” which could subject a provider or broker to criminal penalties or other sanctions.

Although both model acts have been very influential, the states have adopted a wide variety of legislation to regulate life settlements. At least 45 states have adopted some form of legislation relating to life settlements under state insurance laws. However, some states exclude from the definition of security the original sale from the insured or the policy owner to the provider. Unlike most of the various participants in the life settlement industry, life expectancy underwriters are not subject to significant regulation at the state level.

Almost every state treats life settlements as “securities” under state law. Most states expressly include life settlements in their statutory definition of securities, either directly or as part of the definition of an investment contract. In several other states, state courts or state regulators have found life settlements to be a security under an investment contract analysis.

In recent years, new laws regulating life settlements have been enacted and prior laws have been modified. It is important to make sure a life settlement transaction has been and is being handled consistently with governing law. A life settlement transaction may be governed by the law of the state where the investor lives, the state where provider is based, or even some other state. Make sure your life settlement is being handled appropriately.

Life Settlement Lawsuits

Heygood, Orr & Pearson has filed several lawsuits against Life Partners, Inc., a Waco-based subsidiary of Life Partners Holdings, Inc., in connection with the life settlement investments sold by the company. We have filed numerous cases on behalf of individual investors who allege they were overcharged for their life settlement investments based on inaccurate life expectancies prepared for Life Partners. These lawsuits allege that in many instances, Life Partners had life expectancy estimates from legitimate companies in the business of providing life expectancy estimates, but they withheld this information from their own customers.

Heygood Orr & Pearson has also filed lawsuits alleging that Life Partners charged its investors excessive amounts to cover premium payments on their life settlements. Traditionally, life settlement companies pay to the life insurance company only the minimum amount necessary to keep the subject policy from lapsing – called the “cost of insurance.” We have filed claims on behalf of investors alleging that Life Partners has been charging investors the full scheduled premium rather than just the cost of insurance. These lawsuits seek to recover from Life Partners the amount of these excessive charges for premiums on behalf of investors who have been required to pay excessive premiums.

Our firm has also filed lawsuits on behalf of life settlement companies in cases involving life insurance companies that wrongfully refused to pay death benefits on a policy by claiming it was a “stranger originated life insurance,” or STOLI, policy. We have also filed lawsuits in cases where the insurance companies claimed that there was no insurable interest on the insurance policy.

If you or a loved one purchased a Life Settlement policy from Life Partners, or if you are a provider of life settlements who has had a claim for death benefits wrongfully denied by an insurer, you may be eligible to seek compensation through a class action lawsuit or to file your own individual case.

For a free consultation with an attorney to determine your eligibility, contact the lawyers at Heygood, Orr & Pearson by calling our toll-free hotline at 1-877-446-9001. You can also reach us by filling out the free case evaluation form located on this page, and one of our representatives will be in touch with you as soon as possible.

by Jay Pate

John “Jay” Pate is a licensed attorney who focuses his practice on complex tort litigation involving catastrophic personal injury, wrongful death, medical malpractice, and product liability cases.