|Thursday, February 8, 2007
Nancy Condon (202) 728-8379
Herb Perone (202) 728-8464
NASD Investor Alert Cautions Investors About Life Settlements
Washington, DC — NASD today warned seniors about the potential pitfalls of selling their existing life insurance polices for cash in transactions known as "life settlements" or "senior settlements."
The transaction involves selling a life insurance policy that's no longer wanted or needed to a third party - a person or business entity other than the insurance company that issued the policy - typically for more than the policy's cash surrender value but less than its net death benefit.
"Life settlements are not for everyone," said NASD Chairman and CEO Mary Schapiro. "While they can be a valuable source of liquidity for people who no longer want or need their current policies, life settlements can have high transaction costs and can have negative consequences for your financial situation. And it is very difficult to determine whether you're getting a fair price for your policy. The best advice is to proceed with caution."
The NASD Investor Alert issued today - Seniors Beware: What You Should Know About Life Settlements - examines how life settlements work and the factors investors should consider when deciding whether to sell their life insurance policies.
Generally, the purchasers of life insurance policies are institutions called life settlement companies or life settlement providers. They may hold the policies to maturity (that is, the death of the insured person) and collect the net death benefits, or they may resell the policies, or they may sell interests in multiple policies to hedge funds or other investors. The investor selling his or her policy receives a lump sum payment - and the amount of that payment will depend on a range of factors including the investor's age, health and the terms and conditions of the life insurance policy. The purchaser agrees to pay any additional premiums required to keep the policy in effect and receives the death benefit when the investor dies.
The life settlement market has expanded rapidly in recent years, because life settlements have proven profitable not only for institutional investors that purchase policies, but also for the life settlement companies and brokers handling these transactions. Some studies suggest the potential market exceeds $100 billion. As a result, competition among life settlement companies has become increasingly intense, making that market prone to aggressive sales tactics and abuse.
Factors to consider before agreeing to a life settlement include:
Life settlements can involve virtually any type of life insurance policy. Because only variable insurance products are securities, NASD only has jurisdiction over life settlements involving variable policies. Investors with questions or complaints about a life settlement should contact their state insurance commissioner. For life settlements involving a variable life insurance policy, investors may also file a complaint with NASD.
NASD is the leading private-sector provider of financial regulatory services, dedicated to bringing integrity to the markets and confidence to investors through effective and efficient regulation and complementary compliance and technology-based services. NASD offers a broad range of tools and programs to help people better understand investing and know how to protect themselves along the way - including developing and publishing Investor Alerts, brochures and online resource guides on such critical topics as mutual fund class shares and 401(k) and college savings plans. NASD distributes this information through its Web site, printed materials and Investor Forums.
NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.nasd.com.