“Life settlements” are financial transactions in which the original owner of a life insurance policy sells it to a third party for an up front, lump sum payment.  The amount paid for the policy is less than the death benefit on the policy, yet greater than the amount the policyholder would otherwise receive from an insurance company if the policyholder were to surrender the policy for its cash value.  For the life settlement investor that buys the policy, the anticipated return is the difference between the death benefit and the purchase price plus the amount paid in premiums to keep the policy in force until the death benefit is payable.

Some commentators have deemed life settlements as essentially a “bet” on the life of the insured.  The longer the insured lives, the lower the rate of return on the investment.  Critics of life settlements are quick to point out that investors have a financial interest in the early demise of the insured person.  The life settlement industry has been subject to extensive litigation for several years.

An important and as yet unsettled question is whether life settlements are “securities” as defined under federal and state securities law.  This basic question has important ramifications for how life settlement contracts will be treated by courts and regulators. READ MORE →