Vol 8 No 1		January 2006

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Investing in Life Settlement Policies

I cautioned Sam not to introduce Acme investments to his clients or if he does to increase his malpractice insurance.

Again the life settlement issue has raced onto my radar screen (see most recent comments in November 2005 Perspectives, The Intersection of Premium Financing and Life Settlements), but this time in a form posing a danger to estate planning practitioners.

Several days ago I was contacted by an attorney, Sam, who specializes in wealth transfer planning for his clients. He had been solicited by a life settlement firm, Acme Settlements (named changed to protect the ethically-challenged). Acme represented to Sam a 14 year track record of providing 16% average returns to investors of the policies Acme purchases. Acme sells entire policies or fractional interests to individual investors. Sam was so impressed he invested and was ready to recommend Acme Settlement investments to clients. He called me to ask my opinion.

Sam's investment with Acme Settlements came with the name of the insureds, insurance companies, policy numbers, face amounts, life expectancy estimates and investment yields for various dates of death. I called Acme about their purchase of policies and was told that they do not give out insureds' names, etc. Rather, they only give investors a code number.

This is the third time I have learned from investors that some settlement firms provide insureds' names, insurance company names and other pertinent data. But consistently, all settlement firms absolutely deny that such information is given to individual investors. Giving out the names of insureds is very dangerous. The earlier insureds die the higher the investors' return. If insureds knew their names were being given out most of them would not consider selling their policies to that settlement firm, which is why the firms lie about it.

The life settlement market provides a good outlet for clients that truly need to get out from under life insurance policies. As my November 2005 Perspectives noted, there are three tiers of settlement firms. The one that I have most confidence in is Coventry First. They represent that they hold policies for their own investment or package policies to other institutional investors with a covenant that under no circumstance can any individual investor ever know who an insured is. Because Coventry First is mostly investing with their own funds they have to perform astute analysis of life expectancy and policy pricing in order to assure they can receive their target investment yields. My estimate is that the target yields for legitimate settlement firms is today in the 8% to 9% range.

It is my suspicion that firms like Acme are not constrained in the amount they can pay for policies because they are packaging them up to sell to third party investors. Therefore, their tendency is to overpay to beat the competition for the purchase of policies. Acme's claim that they have averaged 16% for 14 years is almost certainly false. Usually the falsehood of such claims is due to phony life expectancies embedded in their sales materials. If the advertised life expectancy is a few years less then actual this will dramatically increase the expected yield.

Not only is it likely the advertised yields won't be realized, but often investors will be obligated to pay in more in order to cover premiums because insureds haven't died. This being a consequence if life expectancies have been fudged to misrepresent higher expected yields. This kind of misrepresentation is right out of the viatical investing world where Acme Settlements got its start. Sam should either drop the idea of recommending Acme to his clients or increase his malpractice insurance.