Thinking about creative schemes to make a lot of money from the elderly and terminally ill? Let’s buy their life insurance policies and re-sell them to investors at a profit.
Or maybe not. On May 8, 2015 the Texas Supreme Court issued an opinion that dealt the “betting on death” industry a big blow.
Buying a life insurance policy from an elderly person (whose life is insured) is called a “life settlement.” Buying a life insurance policy from a terminally ill person (whose life is insured) is called a “viatical settlement.” A company called Life Partners has been in the business of life settlements and viatical settlements since 1991. Life Partners says that the business frees up money that the elder or terminally ill person and his/her family can use during the final days of life.
It works like this. Life Partners contacts a person who owns a life insurance policy insuring himself. Life Partners buys the insurance policy from the person at a discount. It bundles a lot of policies together, and sells portions of the bundles to investors. Life Partners then pays the life insurance premiums and monitors the person’s health. When the person dies, Life Partners collects the full death benefit, and the investors get paid.
So what’s the problem? Well, Life Partners is dealing in risk. It identifies the elderly and terminally ill, investigates their medical histories, and predicts the person’s date of death. It sets the amount it will pay for the policy by calculating how much it will have to pay in premiums to the life insurance company until the person dies. It handles everything, from start to finish, under a cloak of secrecy from the investors who have purchased an interest.
But Date of Death can be unpredictable, and there is something distasteful about the whole scheme. It so happened that some investors, and the State of Texas, became disillusioned and sued Life Partners.
The Texas Supreme Court decided that the bundles that Life Partners was selling were actually securities. Oops. The investors and the State of Texas had said in their lawsuit that Life Partners did not comply with the securities laws when it sold the bundles. Then the Texas Supreme Court said that its decision would apply retroactively, meaning that Life Partners would be liable for its prior transactions. Double oops.
Now toss in an adverse SEC decision and a few bankruptcy filings. It’s not looking too good for investors.
If you’ve been part of these types of investments, give us a call. This decision could mean death to the “betting on death” marketplace.