The option to sell one’s life insurance policy in the life settlement market is an attractive one. Whether individuals need the cash for a specific reason, or whether they just don’t need the policy anymore, there are many, many companies operating in the life settlement industry that can help the consumer to unlock their policy’s value.
However, a surprisingly large number of these companies are neither licensed nor registered with federal and state agencies, even when they should be. One of the life settlement industry’s many benefits is that the secondary market – where the insureds sell their policies – is regulated and intermediated, through a well-defined process. Many of these unlicensed actors make all sorts of claims (and excuses) to explain why they are not licensed or registered, but whether they are a broker, provider, asset manager or service provider (e.g., a life expectancy underwriter), most of the arguments they make simply don’t hold water.
The life settlement business is regulated in 43 states, but who and what is regulated varies from state-to-state. Individuals and companies that claim they either “don’t need” or “aren’t subject to” licensing or registration requirements have all sorts of things they point to as the basis for their being unlicensed. First and foremost, being unlicensed does NOT mean they are unregulated.
Again, the life settlement industry is a regulated business. Brokers, providers, and life expectancy underwriters (to a lesser degree) are predominantly regulated by the department of insurance, or a similarly situated agency, in each regulated state. Asset managers and those who accept, manage, and invest money are also regulated by federal agencies (e.g., the SEC and FINRA).
Those who claim that they aren’t licensed because they “don’t need to be,” regardless of the arguments they make as to why, raise a simple question: Why not get a license anyway? Even if there are loopholes, a lack of clarity in some areas of the law, or some other excuse, for those who interact with sellers in the marketplace (i.e., those who operate on the “sell side” of the business), getting a license as a broker simply isn’t that difficult.
Texas, for example has hundreds of individuals and companies listed as licensed life settlement brokers. There are exceptions in some states, for attorneys and certain other professionals who, if they are compensated differently for their involvement in a life settlement, may not need a license. Regardless, the requirements for obtaining a license as a life settlement broker in most states just aren’t that onerous. So why do unlicensed brokers spend so much time and energy arguing that they don’t have to be licensed when being licensed isn’t that difficult — is it greed? Sloth? Or could it be they wouldn’t qualify if they applied?
One possible answer is that they know that if they are not licensed then they might be able to stay off the regulatory radar. Unlicensed drivers can be charged with motor vehicle infractions, but you cannot put points on a license that doesn’t exist. Unlicensed drivers can’t buy insurance either, but again, if they are unlicensed there has to be a reason, and maybe it’s because there’s something in their background that they know, if revealed, would prevent them from qualifying. Staying unlicensed enables them to operate outside the law for a while longer.
What should institutional investors – both those already allocating capital to an existing fund, or those looking to do so for the first time – be considering here? It’s actually quite simple: Choose to work only with registered and licensed parties when interacting with the life settlement marketplace and ensure that the asset managers that you are allocating capital to are doing so as well. There is nothing an unlicensed vendor can do that a licensed company can’t do, provided its legal, of course. There’s no tangible benefit to working with unlicensed parties, and policies moving through these bad actors could become tainted, worth less than legitimately sourced assets, and potentially entangle investors in legal issues. When conducting due diligence on life settlement fund managers, ask them if their counterparties are licensed or registered and find out where. Then check with the regulators to confirm. A few minutes of due diligence is worth it.
Another form of unlicensed conduct is encroachment. Encroachment is defined by Merriam-Webster as “to enter by gradual steps or by stealth into the possessions or rights of another.” In the life settlement industry, there are several examples of encroachment taking place. Life insurance companies, unlicensed life underwriting companies, and unlicensed life settlement brokers and providers are encroaching on the marketplace in various ways. These behaviors are neither legal nor necessary, and the way in which these parties behave misleads and harms consumers, as well as the institutional investors that are allocating capital to the space.
Some life insurance companies are guilty of encroachment by extending Enhanced Cash Value or ECV offers to consumers holding their policies. An ECV offer is the insurance companies’ way of trying to buy back a policy they issued in the past before it can be sold in the life settlement marketplace. However, this activity violates most states’ life settlement regulations in a number of ways, and NCOIL issued a resolution last year that discourages such activities and prompts regulators to do the same.
One key point however is that an ECV is an offer to buy a policy and that activity is regulated, and in most states, can only be conducted by a licensed life settlement provider. Life insurance companies can apply for a life settlement provider license, but in the main, they haven’t. Instead, they have tried to circumvent existing laws and regulations and disrupt the life settlement marketplace, often, as the definition above states, by stealth.
Why? Because as the old adage says insurance companies (including life insurance companies) are not in the business of paying claims; they are in the business of collecting premiums, managing money, and avoiding risk. In other words, because life settlements almost always result in a claim for benefits, every policy the life insurance company can remove from the marketplace is a claim that won’t be paid.
In the life underwriting sector, another form of encroachment is occurring, but it’s far more subtle and harder to combat. Only two states regulate the business of estimating life expectancy. It’s a difficult and complex thing to regulate and even many life settlement businesses do not understand all it entails. That means that almost anyone can hold themselves out as a life expectancy underwriter. Whether more or different regulation is required is one question, but the other is that most investors, who are the parties that hold the micro-longevity risk related to life settlements, don’t do enough due diligence before they decide which life expectancy underwriters to accept. For the life settlement industry to grow and develop as it should, only licensed companies should be involved in marketplace.
Unlicensed activities generally, and encroachment in particular, is just one form of unlicensed activity to be concerned about. Another form of unlicensed behavior that has a significant impact on consumers, investors and the industry at large involves the proliferation of investment programs promoted by inexperienced, unlicensed, and in some cases, unscrupulous parties. The risks to which these businesses expose individual investors, policy owners, and the legitimate industry are significant.
A casual browsing of the interest reveals that there are dozens of companies offering life settlements to individual investors. There are also quite a few individuals and businesses holding themselves out as buyers of policies that are unlicensed. Sometimes these two activities are combined into a single company (or two affiliated companies). Other promoters are associated with other companies that play one or more roles in the legitimate marketplace but are collaborating with unlicensed actors as well.
As a general matter, conflicts of interest abound in this corner of the investment world. In addition, and ironically, consumers who sell their policy to unlicensed or unscrupulous parties may never know if they’ve been misled or harmed. After all, how often does someone who has sold an asset check to see if they were treated fairly after the transaction has closed. Homework not done beforehand is rarely done after the fact, and even if it is, there’s little or no recourse to be had by then.
On the investment side of the marketplace, unlicensed promoters offer individual investors policies or interests therein based on a sales pitch that is very attractive – at first glance. Sadly, many of these promoters are doing things behind the scenes that expose investors to all sorts of undisclosed and difficult to uncover risks. By the time, the company is in trouble with regulators or the law, it’s too late, and the more time that passes the more money that can be lost.
Take for example the companies that offer individual investors the opportunity to buy individual life settlements. Many of these companies are neither licensed nor regulated, by choice. They argue that they “don’t need to be” or something to that effect, but when something goes wrong, where does the investor turn for help? The answer is that even if there is a place to go, their money is gone, the promoter is gone, and the loss, in real dollars is often significant. The irony is there are plenty of investment companies that are licensed, regulated, and reputable, and for consumers who qualify these compliant firms allow these investors to participate in the marketplace.
So why do these back-alley businesses thrive? It’s because the pitch is usually fashioned around the idea that you can gain access to something that only institutions know and do, but only by going through the promoter’s “back door.” What’s essential for the life settlement industry to continue its recent growth is that the ultimate drivers of this industry – the institutional, investors – continue to advance the intensity, depth and breadth of the due diligence process to ensure that the capital that supports the industry moves through the legitimate, licensed service providers participating in it. , Ultimately – and this is the real benefit of the life settlement space – this will ensure that both consumers and investors are able to secure the best possible outcomes.
Chris Conway is Chief Development Officer at ISC Services