Stricter regulation of the US life settlements market has become
a virtual certainty following the conclusion of a Senate Special
Committee on Aging hearing: Betting on Death in the Life Settlement
Market – What’s At Stake For Seniors?

The hearing in early May came against the background of a traded
life insurance policy market that US financial services firm and
life settlements player Cantor Fitzgerald estimated to be worth $20
billion. Cantor based its estimate on policy face values, and
predicted the market is likely to reach $100 billion in the next
five years.

In a summary of the hearing, the committee noted that its
investigation which began in November 2008 “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”.

In a statement, the committee’s chairman Senator Herb Kohl conceded
that 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,” stressed
Kohl.

“As states across the US struggle to increase regulations and
consumer protections, it is crucial that the federal role is made
clear.”

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Among pitfalls highlighted by the committee was the potential
financial and/or legal liability the seller of a policy faces if
the policy is rescinded due to participation in a fraudulent
transaction such as stranger-originated life insurance
(STOLI).

In essence, STOLI is the initiation of a life insurance policy for
the benefit of a person who, at the time of the creation of the
said policy, has no insurable interest in the insured.

With regard to potential litigation faced by policyholders, the
committee noted a January 2009 report by the Florida Office of
Insurance Regulation that life insurers in the state had filed
three multimillion dollar federal lawsuits in 2008 alleging the
true nature of the transactions were allegedly
misrepresented.

The committee found that while there was virtually no litigation
involving life settlements in 2005, there are currently over 100
cases being litigated nationwide.