Life insurance settlements have caused a great deal of confusion for broker-dealers in the last 24 months as more and more registered representatives are becoming aware of this controversial wealth management strategy. The life settlement is selling an unwanted, unaffordable, or underperforming life insurance policy sold to an institutional purchaser instead of letting the policy lapse. As Registered Representatives grapple for the go-ahead with their compliance department, they are usually confronted with mixed answers as to its viability. To be sure, this strategy is an area of concern for broker-dealers and NASD members alike. Mary Schapiro, Vice Chairman of the NASD, spoke at the Chicago NASD Conference on May 25th, 2005. She addressed, in part, three central issues:


1. “The first risk is to assume that baby boomers have a level of financial acumen that eliminates the need for proper suitability analysis”.

2. “A second risk comes from the very product innovation that has generally served your customers so well”.

3. “A third risk is a failure to analyze the status of these new products under the federal securities laws.”

Chairman Schapiro says that equity-indexed annuities are securities as well as life settlements and may constitute a “selling away” problem, amongst other concerns. She explains: “Equity-indexed annuities are only one example of a financial product that a firm might erroneously treat as a non-security. Other examples include tenants-in-common exchanges and life settlements. NASD considers all of these products to be securities, subject to firm supervision. The NASD is the “watchdog of the SEC,” whose sole purpose is to protect the investing public. One of their preoccupations is to keep in check the “egregious overcharging” of fees generated by manufactured investment products. The NASD seems to be a correlation as to their concern with the nature and size of fees that the life settlement transaction has generated.

The question remains; are life settlement transactions securities? The question of whether life insurance settlements are to be treated as securities is divided into two parts whether we are discussing the back end sales activity, i.e., the distribution of interests in a policy or pool of policies, or the front end activity, i.e., the solicitation and facilitation of the sale of a policy to a life settlement company. Once the policy has been sold into the secondary market, one could conclude that the “transfer for value rule” has been applied, and the insurance contract could be construed as security. Many, however, would conclude that the up-front transaction of a life settlement would not be subjected to securities law and jurisdiction.

Why all the Fuss?

Does the life settlement market deserve such attention? According to the 2004 Life Insurers Fact Book, compiled by the American Council of Life Insurers, $9.4 trillion of life insurance is in force on 167 million policies. Coupled with the fact that emerging demographics show our beloved “Baby Boomers” are hitting retirement, and you can clearly see that the life settlement market is getting on everyone’s radar screen.

Moreover, according to the Conning Research and Consulting whitepaper, “Life Settlements, The Concept Catches On” 2006, they explain that the average life settlement offer approximates 25% and 30% of the face amount.” If it is true that approximately 35% of all settlement proceeds will be re-deployed into new investment vehicles for growth or income, then one can conclude that broker-dealers should have a vested interest. This rings particularly true where there is competition for registered representative recruiting to increase their gross commissions potentially.