Congress is taking a hard look at life settlements, a relatively new practice of selling a life insurance policy to third party investors, out of concern lack of regulation and oversight may lead to exploitation of senior citizens.
“The life settlement industry needs our attention and it will get it, ’’ declared Senator Herb Kohl (D-WI), chairman of the Senate Select Committee on Aging, at the conclusion of a recent committee hearing on the life settlement market.
Kohl and Senator Mel Martinez (R-FL), the panel’s lead Republican, expressed concern that the absence of adequate regulation leads to consumer fraud. Insurance is typically regulated by the states while securities are regulated by the federal government. Life settlements are an awkward hybrid of insurance and securities because the settlements are often bundled and marketed as an investment vehicle, much like subprime mortgages. Witnesses said that the market is now governed by state regulations which vary widely from state to state creating opportunities and loopholes exploited by unscrupulous marketers.
The life settlement industry has grown from $2 billion to an estimated $30 billion a year since 2000. Under the practice, a policy holder sells a life insurance policy for less than its face value to third party investors. The investor expects to profit at the death of the insured by collecting more in death benefits than the amount the investor paid for the policy. Investors typically pay the policy holder more than the amount the insurance company would pay to cash out the policy but the investor is betting on the policy holder to die quickly. Critics say this can be a risky strategy for financially strapped seniors who might be liable for significant tax bills as a result of a life settlement sale.
Senator Martinez said that the life settlement industry “smells like and sounds like’’ the subprime mortgage market which collapsed last year. The Senate Aging Committee is expected to continue its investigation into this area.
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