Life settlement fraud

What it is

A life settlement is described by prosecutors as a transaction in which an investor buys an interest in a terminally ill or elderly person’s life insurance policy death benefit for a lump-sum cash payment. The investor is paid when the insured dies, and profits if the benefit is greater than the price paid. Life settlement fraud sells that investment on false promises of safety and a guaranteed return. In the cases here the money was spent by the promoters, premiums were not paid, or life expectancies were set fraudulently low.

How it actually works

1. The product

   Investors are offered whole or fractional interests in life insurance policies. In the A&O case they were described as bonded life settlements, fixed-maturity investments of four to seven years with a guaranteed minimum compounded annual return of 10% to 12%. In the ABC Viaticals complaint the SEC alleged returns of 27% to 150%.

2. The assurances

   Sellers offer protection. The SEC alleged that ABC told investors an independent escrow agent controlled the funds, that enough money to pay premiums for the insured’s life expectancy was segregated in a separate escrow account, and that financial guarantee bonds fixed the date and amount of the return. Mutual Benefits promised to escrow enough money for anticipated premiums.

3. The sales channel

   The investments are sold by agents, advisers and marketing networks. MBC directed an international network of sales agents and marketing directors. A&O paid a marketing company and independent insurance agents who were not securities licensed a 10% commission on each purchase. In Massachusetts, the seller was an insurance adviser.

4. The shortfall

   The product depends on premiums being paid until death. Prosecutors said MBC assigned fraudulently low life expectancies, so premium reserves were insufficient, and it used premium funds from recently sold policies to pay premiums on older policies that had not matured. The Massachusetts adviser let policies lapse by not paying premiums.

   Where it could have stopped

   The SEC wrote in 2011 that without a bond a life settlement investment is open-ended, because the pay-out date depends on the date of death. A guarantee of a fixed date and return therefore depends on who stands behind it. The SEC alleged that one bond issuer misrepresented whether its financial statements had been audited and had no reinsurance coverage.

5. The cover-up

   When regulators looked, the cases describe a cover story. Law enforcement said the A&O men set up a phony series of sales of the firm in 2007 and created sham companies, and the general counsel hired an actor who pretended to do due diligence, according to the ABA Journal.

6. The collapse and prosecution

   A&O went into bankruptcy in September 2009 after failing to pay premiums on its policies. Sentences documented here run from more than eight years to 60 years.

Why it works

The pitch is safety. The U.S. Attorney said in the A&O case that “the safety, security and no-risk nature of the investment was critical to the sales pitch.” The product combined a guaranteed return with words such as bond, escrow and reinsurance.

The sellers were in insurance. The Massachusetts defendant was an insurance adviser, and A&O’s sellers were independent insurance agents.

Death is not on a schedule. The investor is paid when the insured dies and premiums are owed in the meantime; the longer the insured lives, the more premium payments must be made, according to the U.S. Attorney’s Office.

Where it comes from

Entirely domestic in the documented cases, though A&O’s investors stretched across the United States and Canada and the SEC alleged ABC raised money from investors worldwide.

The earliest conduct here. The Massachusetts scheme ran from 2001, and the SEC alleged ABC Viaticals raised money from at least June 2001. The cases were prosecuted between 2007 and 2013.

Older cases. The sources are from 2007 to 2013 and the SEC releases are from 2007 and 2011. This page does not describe recent enforcement because none was found in the sources read.

Real cases

Red flags

• A guaranteed return, or a fixed maturity date, on an investment that depends on when a stranger dies.
• A bond or guarantee from a company you cannot check. The SEC alleged one issuer’s audits were not real.
• A seller who is an insurance agent without a securities licence.
• Returns in the double digits described as safe.
• Promises that escrow accounts will pay the premiums, when you cannot see the account.

If it’s happening to you

If you are offered a life settlement investment, or you hold one that has stopped paying:

1. Ask who holds the policy, who pays the premiums and who controls the escrow, and get the answers in writing.
2. Check the seller with your state securities regulator. In the A&O case, the sellers were not securities licensed.
3. Be cautious about guarantees and bonds. The SEC alleged one bond issuer misrepresented its audits and reinsurance.
4. Report it. See where to report.
5. Keep all papers, including the agreement, the escrow statements and the bond, as they may be needed in a court case.

Where the money goes

Domestic in the cases here.

Investor money goes to the promoter or the seller. In the A&O case, the U.S. Attorney’s Office said it was spent on multi-million dollar homes, high-end cars and diamonds, and the sellers were paid a 10% commission. In the Massachusetts case, prosecutors said the adviser diverted money for personal use. In the MBC case, the U.S. Attorney’s release says new sales paid premiums on older policies.

By the numbers

No published dataset breaks this scheme out as its own category yet, so there is no chart to show. The data page explains which agency categories exist and why some schemes are invisible in official statistics.