On January 19, 2011, the US Securities and Exchange Commission’s (the “SEC”) Office of Investor Education and Advocacy issued an investor bulletin (the “Bulletin”) to provide information about life settlements and highlight some of the considerations for investors. Among other things, the Bulletin advises investors to consider the points listed below.
- The return on a life settlement contract depends on the insured’s life expectancy and the date of the insured’s death. Therefore, the accuracy of a life expectancy estimate is critical.
- In response to concerns about the accuracy of life expectancy estimates, some companies have guaranteed that they will pay investors the amount they would have received had the insured died by the estimated date. The SEC has recently brought an enforcement action against a company alleging that it made fraudulent claims about these guarantees.
- The investor may not receive the death benefit (e.g. if the life insurance company refuses to pay the death benefit, or the heirs of the insured challenge the life settlement).
- Generally, life expectancy underwriters are not licensed or registered by state insurance departments, and their methodologies are not usually disclosed.
- Life settlements can give rise to privacy issues as investors may want access to the insured’s medical information to assess the investment.