Life settlement brokers represent policy owners for a fee or  commission and may solicit bids for policies from multiple life settlement  providers with the goal of obtaining the best price. No comprehensive data exist on the size of the life settlement market, but  estimates and other data indicate that the market grew rapidly from its  inception around 1998 until the recent financial crisis. Life settlements traditionally have involved high-dollar- amount policies insuring older Americans. SEC also has asserted jurisdiction over certain types of  investments in life settlements of nonvariable, or traditional, life insurance  policies, but their status as securities is unclear because of conflicting  decisions from the U.S. Courts of Appeals for the District of Columbia and  the Eleventh Circuit. Regulatory Inconsistencies May Pose Challenges for Policy Owners, Investors, and Life Settlement Intermediaries

Inconsistencies in the regulation of life settlements may pose a number of  challenges. In addition to the lack of  uniformity, policy owners in some states could complete a life settlement  without knowing how much they paid their brokers or whether they  received a fair price for their policies, unless such information voluntarily  was provided to them. We recently developed a framework for assessing proposals for  modernizing the financial regulatory system. These two elements have not been fully achieved under the current regulatory  structure of the life settlement market. NAIC and not state whether it  agreed or disagreed with our matter for congressional consideration but  raised related concerns. What challenges are policy owners, investors, and life insurance companies facing in connection with the life settlement market? Federal and state securities regulators oversee the securities markets, in part to  protect investors. The life settlement market is organized largely as an informal network of specialized intermediaries that facilitate the sale of existing life insurance policies by their owners to third-party investors. Estimates of the total face value of policies settled in 2008 ranged  from around $9 billion to $12 billion. As of February 2010, 38 states have enacted insurance laws and  regulations specifically to regulate life settlements.1 State insurance  regulators generally focus on regulating the front-end transaction to protect  policy owners, such as by imposing licensing, disclosure, reporting, and  other requirements on brokers and providers. Variable life policies are securities; thus, settlements involving  these policies are securities subject to its jurisdiction. According to NASAA and our own independent research, all but two states  regulate investments in life settlement as securities under their securities  laws. Twelve states  and the District of Columbia have not enacted laws governing life  settlements, and disclosure requirements can differ among the other states. Some individual investors may face challenges obtaining adequate information about life settlement investments. Due to conflicting decisions by  the U.S. Courts of Appeals for the District of Columbia and the Eleventh  Circuit on whether investments in viatical settlements are securities and  differences in state laws, individuals in different states investing in the same  type of life settlement investment may be afforded different regulatory  protections and receive different disclosures about their investment. Some life settlement brokers and providers may face challenges because of  inconsistencies in the life settlement laws across states. Summary (continued)

		As Congress considers how best to reform the regulatory structure of the financial services sector, it may wish to consider taking steps to help ensure that policy owners involved in life settlement transactions are provided a consistent and minimum level of protection. Life Settlement Market Organized Largely as an Informal

		Policy owners may sell their policies directly to investors in some cases, but owners and investors commonly use intermediaries, including agents, life settlement brokers, and life settlement providers, to assist them with their life settlement transactions (see fig. Providers sell policies to investors. State and Federal Regulators Oversee Various Aspects of the

		Life settlements typically comprise two transactions: (1) the sale of a policy by the owner to a provider, which itself is the life settlement contract, and (2) the sale of the policy or an interest in the policy or its proceeds by providers to investors. Although life settlements can provide policy owners with a valuable option, policy owners can face challenges with these transactions, such as

assessing whether a life settlement is suitable or the best option for   knowing whether they are being offered a fair price for their policy,  because little information about the market value of policies is publicly available;  understanding the potential risks or implications associated with life  settlements, including that the proceeds may be taxable or the  transaction could limit their ability to obtain insurance in the future; or   protecting themselves from potential abuse, such as excessive  broker commissions. Policy owners in some states may be afforded less protection than policy owners

in other states due to regulatory inconsistencies and, thus, face greater  challenges obtaining information needed to protect their interests. a.
Why GAO Did This Study

Since the late 1990s, life settlements have offered consumers benefits but also exposed them to risks, giving rise to regulatory concerns. A policy owner with unneeded life insurance can surrender the policy to the insurer for its cash surrender value. Or, the owner may receive more by selling the policy to a third-party investor through a life settlement. These transactions have involved high-dollar-amount policies covering older persons. Despite their potential benefits, life settlements can have unintended consequences for policy owners, such as unexpected tax liabilities. Also, policy owners commonly rely on intermediaries to help them, and some intermediaries may engage in abusive practices. As requested, this report addresses how the life settlement market is organized and regulated, and what challenges policy owners, investors, and others face in connection with life settlements. GAO reviewed and analyzed studies on life settlements and applicable state and federal laws; surveyed insurance regulators and life settlement providers; and interviewed relevant market participants, state and federal regulators, trade associations, and market observers.

What GAO Found

The life settlement market is organized largely as an informal network of intermediaries facilitating the sale of life insurance policies by owners to third-party investors. Policy owners may sell policies directly to investors in some cases, but owners and investors commonly use intermediaries. Life settlement brokers represent policy owners for a fee or commission and may solicit bids for policies from multiple life settlement providers with the goal of obtaining the best price. Life settlement providers buy life insurance policies for investors or for their own accounts. No comprehensive data exist on market size, but estimates indicate it grew rapidly from its inception around 1998 until the recent financial crisis. Estimates of the total face value of policies settled in 2008 ranged from around $9 billion to $12 billion. State and federal regulators oversee various aspects of the life settlement market. Life settlements typically comprise two transactions: the sale of a policy by its owner to a provider, and the sale of a policy by the provider to an investor. As of February 2010, 38 states had insurance laws specifically to regulate life settlements. State insurance regulators focus on regulating life settlements to protect policy owners by imposing licensing, disclosure, and other requirements on brokers and providers. The Securities and Exchange Commission (SEC), where its jurisdiction permits, and state securities regulators regulate investments in life settlements to protect investors. One type of policy (variable life) is considered a security; thus, settlements involving these policies are under SEC jurisdiction. SEC also asserted jurisdiction over certain investments in life settlements involving nonvariable, or traditional, life insurance policies, but their status as securities is unclear because of conflicting circuit court decisions. All but two states regulate investments in life settlements as securities under their securities laws. Inconsistencies in the regulation of life settlements may pose challenges. Policy owners in some states may be afforded less protection than owners in other states and face greater challenges obtaining information to protect their interests. Twelve states and the District of Columbia do not have laws specifically governing life settlements, and disclosure requirements can differ among the other states. Policy owners also could complete a life settlement without knowing how much they paid brokers or whether they received a fair price, unless such information was provided voluntarily. Some investors may face challenges obtaining adequate information about life settlement investments. Because of conflicting court decisions and differences in state laws, individuals in different states with the same investments may be afforded different regulatory protections. Some life settlement brokers and providers may face challenges because of inconsistencies in laws across states. GAO developed a framework for assessing proposals for modernizing the financial regulatory system, two elements of which are consistent consumer and investor protection and consistent financial oversight for similar institutions and products. These two elements have not been fully achieved under the current regulatory structure of the life settlement market. Congress may wish to consider taking steps to help ensure that policy owners involved in life settlements are provided a consistent and minimum level of protection. SEC agreed with our matter for congressional consideration, and the National Association of Insurance Commissioners did not agree or disagree with it but raised related concerns.