Contact Us
Firm Overview
Why Legend Is Different
Client Types
Professional Biographies
Frequently & Rarely Asked Questions
Risk Spectrum
Investment Strategies
Second Opinion
Global Investment Pulse
Event Calendar
Press Center
Legend News
Clients Only
Career Opportunities
Directions
Newsletter Sign-up
Site Search
Site Map
Home
Tell A Friend About This Website
 
 
 
Financial Briefs

 

Phone: (412) 635-9210
  (888) 236-5960
Connect With Legend:
Subscribe to me on YouTube

Feds Warn Of Life Settlement Dangers

The quiet “life settlement” industry was shaken recently when the federal government warned investors about the risks associated with these little-regulated investments. Although a life settlement still may be a viable option for savvy investors, you’re advised to proceed with caution.


The basic idea of a life settlement is that the owner of a policy can sell it to a funding company, typically for more than the policy’s cash value but for only 30% to 80% of its death benefit. In most cases, the seller is someone who no longer wants or needs the policy, or who can’t afford to pay the premiums. The owner generally receives a lump sum cash payment.

The funding company then pays the premiums to keep the policy in force until the insured person dies, at which time the company receives the face value of the insurance. Meanwhile, the funding company sells shares in pools of the policies it owns. Investors don’t know how long premiums will have to be paid or when the policy proceeds will be distributed, both of which help determine the returns on this investment. If the insured people die sooner than expected, that boosts returns; if they die later, returns will suffer.

A July 10 report from the Government Accountability Office (GAO) raised concerns about a “lack of clear, consistent state oversight” of life settlements. A dozen states and the District of Columbia don’t have laws specifically addressing life settlements, and in those jurisdictions, policyholders may not know whether they’ve received fair value for their policies, and investors may be in the dark about an asset that isn’t tied to stock market performance.

The GAO report follows a recommendation from the U.S. Securities and Exchange Commission (SEC) that investors would benefit from tighter regulation of this industry. The largest regulatory body for the securities industry—the Financial Industry Regulatory Authority (FINRA)—came to the same conclusion in 2009.

Investors in life settlements face at least four key risks. The first is longevity risk—that with life expectancies increasing, the people insured by policies in life settlements may live longer than expected. A second, related risk is underwriter error, in which the insurer underestimates life expectancies, while a third is legal risk—that because of fraud, the failure of insurance companies, or other problems, policy proceeds don’t go to investors. Finally, there’s liquidity risk. If investors are unable to pay policy premiums, the insurance will lapse and there will be no payout.

These are complicated investments, and whether you’re buying or selling, it’s crucial to understand the risks and potential benefits. If you have questions about life settlements, please give us a call.
 

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.



INDEX
  • Why Aren't More Millennials Moving On Up And Out?
  • Taking Socially Responsible Investing To The Next Level
  • Don't Be Caught Red-Handed By The Wash Sale Rule
  • Leading Economic Indicators Hit 10-Year High
  • Avoid These 6 Mistakes In Stretch IRA Planning
  • More Flexibility Allowed In Flex Spending Accounts
  • Individual Bonds-Ugh!
  • Set Aside The Funds One Might Need For A Rainy Day
  • Protect Against Possible Terrorist Attack
  • U.S. Leading Economic Indicators Rose Again
  • Fed Chair Strikes A More Cautious Tone, But Still Expects Moderate Growth
  • Count Off 3 Tax Breaks For Higher Education
  • Don't Be Victimized By These 10 Common Scams
  • Retirement Plan Choices For The Self-Employed
  • New Law Says Tax Debtors May Lose Their Passports
  • Compare Minor's Account To 529 Plan
  • Are You Being Socially Responsible?
  • 8 Smart Moves For College Grads
  • Seeking Financial Aid: Don't Fear The FAFSA
  • New Baby? Consider An Education Savings Plan
  • HOW THE IRS RESOLVES AN IDENTITY THEFT CASE:
  • 3 Ways To Deduct Mortgage Interest
  • HOW THE IRS RESOLVES AN IDENTITY THEFT CASE
  • Understanding Deflation
  • Don't Play Up Super Bowl Outcome In Stock Decisions
  • When Should Millennials Start Retirement Saving?
  • Have Your Child Kick Into A Roth With A Reward To Boot
  • Sizing Up The Energy Boost To The Economy
  • A Stock Plunge Amid Strong Economic Data
  • 14 Top Year-End Tax Moves For Individuals In 2014
  • Drill Down For Three Key Oil And Gas Tax Breaks
  • When It Pays To ID Security Sales
  • GDP Growth Data Masks Strength Of The Recovery
  • Be On The Lookout For Crimes Involving An Elder Fraud
  • UNDERPERFORMANCE/OVERPERFORMANCE
  • S&P 500's New All Time High Wednesday Will Probably Continue Over Upcoming Months, But Other Indexes Are Struggling
  • U.S. Stock valuations are within the top 10 valuations of all time but probably won't crash. Why?
  • Seven Steps To Digging Your Way Out Of Deep Debt
  • 5 Steps To Protect The Digital Assets You Own
  • The Long-Term Fiscal Status Of The United States
  • Margin Debt At Record Levels
  • What To Do When You're Suddenly Widowed
  • A Common Error In Powers Of Attorney
  • Should You Move To A Different State?
  • Tax Cost Of Being Your Own Landlord
  • Why Do GRATs Remain In Such High Demand?
  • Don't Wait To Harvest Your Losses
  • The Best States To Move To For Tax Purposes
  • 10 Reasons For The IRS To Flag Your Return
  • Many Women Face Special Challenges As Retirement Nears
  • Nine Reasons To Consolidate Debt
  • Straight Talk About Living Trusts
  • SEPPs From An IRA: Don't Change Horses Midstream
  • New Regulations Fill In Gaps On 3.8% Surtax
  • Do You Know Life Insurance Basics?
  • Top Income-Earners Drive U.S. Economic Growth
  • Give IRA Cash To Charity: Heads You Win, Tails You Win
  • Four Wash Sale Strategies To Help Clean Up Taxes
  • College Savings: How Much Do You Need Each Month?
  • Surprising New Research: Large Caps Top Small Caps
  • Newly Widowed Face 401(k), IRA Options
  • Retirement Saving Takes Time And Must Be A Priority
  • Divide-Conquer To Convert To Roth IRA
  • What Is Probate And What Does It Protect?
  • A Research Surprise On Bond Funds
  • After New Tax Law, Do You Still Need A Bypass Trust?
  • Start Estate Planning For Your Child Now
  • Seven Tax Ideas To Use Throughout The Year
  • A Comprehensive Way To Plan For College Savings
  • Bulletproofing Your Will Before Death
  • IRS Mercy on 60-Day IRA Rollover Error
  • Feds Warn Of Life Settlement Dangers
  • Know The Tax Rules On Charitable Gift Deductions
  • IRS Ruling Boosts IDTs as Estate Planning Technique
  • A Defined Benefit Plan Lets You Sock Away Large Amounts If You Can Overcome Some Obstacles
  • Economic Shifts Bring New Pitfalls And Prizes
  • Evaluating Great Companies
  • Inflation Versus Deflation
  • Jeremy Grantham And Lou Stanasolovich Discuss Market Valuations
  • Ramifications Of A Weakening Dollar
  • Secular Versus Cyclical Bear Markets
  • Small Business And Work Opportunity Tax Act
  • Time To Plan For Estates, Wills, & Trusts



  • ©2017 Legend Financial Advisors, Inc.®. All rights reserved.