Life settlements are back on regulators' radar again as state legislators come up with laws that encourage the elderly to sell their life insurance policies as a way to pay for long-term-care needs.
Texas Gov. Rick Perry last Friday signed a bill into law that will allow the state to offset the costs of providing medical assistance to individuals who sell off their life insurance policy to a third party and use the proceeds to foot the bill for LTC services.
Similar legislation is being considered in seven other states — California, Florida, Kentucky, Louisiana, Maine, New Jersey and New York — as a way to scrimp on Medicaid costs, according to The Wall Street Journal.
Life settlements involve the sale of a person's life insurance policy in the secondary market to investors who pay the seller a discounted amount and then take over the responsibility for the premium payments. When the person dies, the investors collect the death benefit.
The resurgence of life settlements, especially with the blessing of state legislators, is worrisome to regulators, who are expected to take a closer look.
“There have been some problems in that space in the past, and I think we'll take a look at those kinds of recommendations and strategies for suitability,” said Daniel Sibears, executive vice president of member regulation at the
Financial Industry Regulatory Authority Inc., speaking on a panel of regulators at the Insured Retirement Institute's Government, Legal and Regulatory Conference in Washington today.
Four years ago, Finra released an investor alert warning elderly clients of the pitfalls of life settlements: high transactional costs, the difficulty of discerning whether an offering price for a policy is fair and the tax consequences of receiving the lump-sum payment. That year, the organization also released its Regulatory Notice 09-42, reminding broker-dealer firms of their duties with respect to life settlements involving variable life insurance policies.
Further, the Securities and Exchange Commission's life settlements task force in 2010 had recommended that Congress include life settlements as a security.
Life settlements were just one of many of the recent developments Mr. Sibears had highlighted as areas of interest for Finra. He noted that the regulator hopes to see broker-dealers perform more due diligence of companies that issue annuities, as well as municipalities and their bonds.
Data security at the broker-dealer is also a worry, as clients have complained about their information being compromised via hackers phishing for account passwords via e-mail, impersonating the client and wiring the money out.
“Firms are making people whole, but it's an issue for them to be focused on,” Mr. Sibears added.
