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Committee Investigation Reveals Lack of Consumer Protections, Federal Oversight of Exploding Industry

WASHINGTON - Today U.S. Senate Special Committee on Aging Chairman Herb Kohl (D-WI) held a hearing entitled, "Betting on Death in the Life Settlement Market - What's At Stake For Seniors?" The hearing explored the burgeoning life settlement market, an industry that has doubled in value since 2006 to a worth of $12 billion, and which analysts expect will exceed $160 billion within a few decades. A life settlement is a financial arrangement in which a person sells their life insurance policy to investors, who continue to pay the policy premiums and collect the payout upon the seller's death. A Committee investigation has uncovered unintended consequences for consumers, sales and marketing abuses, and insurance fraud, all of which are exacerbated by the high commissions earned by life settlement brokers.
"Life settlements can be a worthy alternative for seniors who are considering the sale of their life insurance policy, and offer a higher payment than the cash surrender value offered by the insurance company. But selling one's life insurance policy is a complex transaction that may be fraught with possible hidden pitfalls," said Chairman Kohl. "As states struggle to increase regulations and consumer protections, it is crucial that the federal role is made clear."
The Committee heard from three state regulators about the regulations to combat some of the more questionable practices of the life settlement industry. State regulators have also been working to put a stop to insurance fraud in the form of stranger-originated life insurance, or "STOLI," wherein brokers convince seniors to purchase life insurance, with the agreement that after a period of time, the policy will be sold to the broker. State witnesses included Mary Beth Senkewicz, Florida's Deputy Commissioner of Life and Health Insurance; Michael McRaith, Director of the Insurance Division of the Illinois Department of Financial and Professional Regulation; and Fred Joseph, Colorado Securities Commissioner and president of the North American Securities Administrators Association (NASAA).
In the midst of a financial crisis that has been blamed on a lack of oversight and regulation, the Committee examined how life settlements are being bundled and used as potentially risky investments by some of America's largest investment companies. Witnesses testified about the risks associated with purchasing investments backed by life settlements, and explained why they are not generally considered suitable for non-institutional investors. Chairman Kohl wrote letters to the Internal Revenue Service (IRS) and the U.S. Securities and Exchange Commission (SEC), urging them to issue relevant regulations to govern the industry. In a reply, Treasury Secretary Timothy Geithner stated that the agency will soon publish tax guidance for people who sell their policies and the investors who purchase them. Mary Schapiro, Chairwoman of the SEC, also responded, clarifying the SEC's jurisdiction over most aspects of life settlement transactions, and assuring Chairman Kohl that the agency would look into the regulation of life settlement brokers.
The hearing's second panel included representatives from the life insurance and life settlement industries, including James Avery, Jr. on behalf of the American Council of Life Insurers (ACLI); Scott Peden, president of Life Partners, Inc., based in Waco, Texas; and Michael Freedman, senior vice president of government affairs for Coventry, the largest life settlement provider, based in Fort Washington, Pennsylvania.
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For Committee investigation findings and IRS and SEC responses, click here:
For Chairman Kohl's letter to the IRS, click here:
For Chairman Kohl's letter to the SEC, click here:
A webcast of the hearing will be available within 24 hours: