Washington State Department of Financial Institutions

Alert from DFI
Considering Selling Life Settlement Investments?

August 10, 2010

The Washington State Securities Division has received a number of inquiries about whether persons who are not licensed as securities salespersons or broker-dealers may sell investments in life settlements to their customers.

This alert explains how investments in life settlements may be securities and discusses the possible consequences of selling such investments.

What is a Life Settlement?

Under a life settlement contract, an insured individual sells the insured’s life insurance policy to a third party in return for cash, a loan, or other consideration. The sale price exceeds the amount of any cash surrender value but is less than the expected death benefit of the policy. In Washington, the creation of life settlements is regulated by the Office of the Insurance Commissioner under the Life Settlements Act, chapter 48.102 RCW.

How Are Life Settlements Different from Viatical Settlements?

Life settlements are functionally the same as viatical settlements and differ only in that viatical settlements involve insured individuals who have a life expectancy of less than twenty-four months. More information about viatical settlements.

What is a Life Settlement Investment?

After a life settlement contract has been created, the contract, or an interest in it, may be sold as an investment. In the case of life settlements, an investor may purchase a whole life settlement contract or a fractional interest in a life settlement contract. In the case of fractional interests, investors typically rely on a provider or broker to administer the contract.

Why Might a Life Settlement Investment Be Considered a Security for the Purposes of the Securities Act of Washington?

Life settlement investments often fit the definition of a “security” under the Securities Act of Washington, chapter 21.20 RCW. Among other things, the definition of “security” includes an investment contract. Under the investment contract test, a security exists when there is an investment of money in a common enterprise with the expectation of profits to be derived primarily from the efforts of others. A life settlement investment often constitutes a “security” under the investment contract test and may be deemed a security on an alternative basis.

What Can I Do to Determine Whether a Life Settlement Investment is a Security?

To determine whether a contemplated life settlement investment transaction involves a security, you are encouraged to consult with a private attorney that has experience in securities laws.

What Are the Possible Consequences of Selling an Unregistered Life Settlement Investment?

If a life settlement investment meets the definition of a security, the offer or sale of the investment may be required to be registered under the Securities Act of Washington. A person or firm that receives compensation for selling life settlement investments may be required to register as a securities salesperson or a broker-dealer. A person who willfully violates the Securities Act or the rules adopted there under is subject to criminal prosecution for a felony.

What Are the Possible Consequences of Selling a Life Settlement Investment as a Registered Securities Salesperson?

Even if a salesperson is currently licensed to sell securities in this State, the salesperson needs to check to make sure that the life settlement investments proposed to be offered have been approved for sale by the broker-dealer the salesperson represents. “Selling away,” or selling securities off the books of the broker-dealer, could result in disciplinary action by the broker-dealer and suspension or revocation of the salesperson’s registration.

What Factors Need To Be Considered When Determining Whether a Life Settlement Is Appropriate for a Prospective Customer?

When selling any investment, the purchaser’s age, financial situation and needs, and investment objectives must be taken into consideration. Failure to take these factors into consideration when selling an investment may subject the seller to liability under the Securities Act as well as under FINRA rules.

How Do the Anti-Fraud Provisions of the Securities Act Affect the Sale of Life Settlement Investments?

Under the anti-fraud provisions of the Securities Act, misleading statements and material omissions made during the offer or sale of a life settlement investment that is a security constitute fraud regardless of whether or not the investment is registered. Even if the life settlement investment is not a security, misleading statements and material omissions may constitute fraud under the Washington State Consumer Protection Act.

Where Can I Obtain Further Information Regarding Life Settlement Investments?

In July 2010, the SEC completed a study of the life settlements market (PDF)*. Concurrent with that report, the SEC posted an investor bulletin on life settlement investments.

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