Texas Looks to Clamp Down on Life Insurance Settlements

Texas securities regulators are working to shut down at least six companies that buy life insurance policies at a discount from retirees.

The so-called life settlements ostensibly offer the retirees lump-sum payments for a portion of those policies but, in many cases, cost retirees much or all of their investments. Advertised returns of 20 percent or more per year has made the concept enticing to retirees who have seen their retirement portfolios shrink in recent years from market reverses.

However, the business has grown in Texas because of a lack of any meaningful oversight, the Austin American-Statesman reported in May 1 editions.

According to the Texas State Securities Board, 2,200 investors have put $220 million into the policies for life settlement cash outs over the past two years. Hundreds of others have paid tens of millions of dollars more into policies that are targeted by Texas-related federal enforcement action.

Woes have come to those who have underestimated life expectancies of those from whom policies are bought. Court records also have showed that some marketing the settlements have bilked investors out of millions of dollars.

“When all is said and done, many investors will have lost substantial amounts, or all, of their money,” Texas State Securities Board spokesman Robert Elder told the newspaper.

The life settlement concept has been around since it was marketed to terminally ill AIDS patients in the 1990s. Life settlement companies typically buy life insurance policies from elderly policyholders, with a purchase price based on the policyholder’s life expectancy.

Regulation of the life settlement business varies from state to state. Consequently, “individuals in different states investing in the same life settlement investment may be afforded different regulatory protections,” according to a 2010 Government Accountability Office study.

In Texas, unlike most other states, life settlement investments are not recognized as investments subject to regulation as such. State Insurance Commissioner Mike Geeslin urged lawmakers to consider tighter state regulation of the life settlement business.

“Even though the settlement industry is relatively young, it has produced a substantial amount of harm to Texas investors,” he wrote.

Yet, with less than a month left in the regular session of the Legislature, no such legislation has been introduced in either of the state’s legislative chambers.

Regulators say recent actions in Texas by state and federal securities agencies show how easily small investors can be misled. Not only can policyholders face unexpected expenses if they live longer than their policies provide for, court filings show that some life settlement executives have diverted investors’ funds for personal use.

Sharon Brady, a 66-year-old Tarrant County sheriff’s deputy, and her husband invested $50,000 to a life-settlement marketer. Last spring, she got a letter from the state securities board, saying that it had ordered the marketer to shut down. Now, her investment is tied up in court and she doesn’t know how much of it she will see again.

“I worked so hard for that money. I never even made $50,000 a year,” she told the American-Statesman.

Information from: Austin American-Statesman