Detecting and Avoiding Fraud in Life Settlement Investments

A Market Ripe for Fraud?

Like any market that involves large sums of money and complex transactions, the life settlement industry is not immune to fraud. Investors need to be vigilant and conduct thorough due diligence to protect themselves from unscrupulous actors. Fraud can occur at various stages of the life settlement process, from the initial application to the final payout.

Common Types of Life Settlement Fraud

• Stranger-Originated Life Insurance (STOLI): This is one of the most common and well-known types of fraud. In a STOLI scheme, a life insurance policy is purchased for the sole purpose of being sold to an investor. The insured person often has no intention of keeping the policy and may be paid a fee for their participation. STOLI is illegal in most states and can result in the denial of a death benefit claim.
• Identity Theft: In some cases, fraudsters may use stolen identities to take out life insurance policies and then sell them to unsuspecting investors.
• Misrepresentation of Medical History: An applicant may intentionally misrepresent their medical history to obtain a more favorable life expectancy estimate, which can inflate the value of the policy.
• Premium Diversion: A fraudulent life settlement provider may collect premium payments from an investor but fail to remit them to the insurance company, causing the policy to lapse.

Red Flags for Investors

Investors should be on the lookout for the following red flags:

• Policies with a short contestability period: The contestability period is the time during which an insurance company can investigate and deny a claim. A policy that is still within its contestability period (typically two years) is a higher risk for fraud.
• Lack of a clear insurable interest: The person who takes out a life insurance policy should have a clear "insurable interest" in the life of the insured. If there is no clear relationship, it could be a sign of a STOLI scheme.
• Pressure to act quickly: Fraudsters often use high-pressure sales tactics to rush investors into making a decision before they have had time to conduct proper due diligence.
• Unusually high projected returns: If an investment seems too good to be true, it probably is.

How to Protect Yourself

• Work with licensed and reputable professionals: Always verify the licenses of any brokers or providers you are considering working with.
• Conduct independent due diligence: Do not rely solely on the information provided by the seller or broker. Obtain an independent life expectancy report and review all of the policy documents carefully.
• Be wary of unsolicited offers: Be skeptical of anyone who contacts you out of the blue with an offer to invest in a life settlement.
• Consult with a qualified professional: Before making any investment, consult with a qualified financial advisor or attorney who has experience in the life settlement market.