S. HRG. 111–95 

BETTING ON DEATH IN THE LIFE SETTLEMENT 

MARKET: WHAT’S AT STAKE FOR SENIORS? 

HEARING 

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

WASHINGTON, DC 

APRIL 29, 2009 

Serial No. 111–4 

( 

Printed for the use of the Special Committee on Aging 

Betting on Death in the Life Settlement Market: What’s At Stake for Seniors? 

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51–547 PDF 2009

S. HRG. 111–95 

BETTING ON DEATH IN THE LIFE SETTLEMENT 

MARKET: WHAT’S AT STAKE FOR SENIORS? 

HEARING 

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

WASHINGTON, DC 

APRIL 29, 2009 

Serial No. 111–4 

Printed for the use of the Special Committee on Aging 

( 

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html 

SPECIAL COMMITTEE ON AGING 

HERB KOHL, Wisconsin, Chairman 

RON WYDEN, Oregon 

BLANCHE L. LINCOLN, Arkansas 

EVAN BAYH, Indiana 

BILL NELSON, Florida 

ROBERT P. CASEY, Jr., Pennsylvania 

CLAIRE McCASKILL, Missouri 

SHELDON WHITEHOUSE, Rhode Island 

MARK UDALL, Colorado 

KIRSTEN GILLIBRAND, New York 

MICHAEL BENNET, Colorado 

ARLEN SPECTER, Pennsylvania 

MEL MARTINEZ, Florida 

RICHARD SHELBY, Alabama 

SUSAN COLLINS, Maine 

BOB CORKER, Tennessee 

ORRIN HATCH, Utah 

SAM BROWNBACK, Kansas 

LINDSEY GRAHAM, South Carolina 

DEBRA WHITMAN, Majority Staff Director 

MICHAEL BASSETT, Ranking Member Staff Director 

(II) 

C O N T E N T S 

Page 

Opening Statement of Senator Herb Kohl ............................................................. 1 

Statement of Senator Mel Martinez ....................................................................... 3 

PANEL I 

Statement of Stephan Leimberg, CEO, Leimberg Information Services, Inc., 

Havertown, PA ..................................................................................................... 4 

Statement of Mary Beth Senkewicz, Deputy Commissioner, Life and Health 

Insurance, Florida Office of Insurance Regulation, Tallahassee, FL ............... 17 

Statement of Michael McRaith, Director, Division of Insurance, Illinois Department of Financial and Professional Regulation, Chicago, IL .................... 33 

Statement of Fred Joseph, Commissioner, Division of Securities, Colorado 

Department of Regulatory Agencies, Denver, CO ............................................. 47 

PANEL II 

Statement of James Avery, Jr., President, Individual Life for Prudential 

Financial, Newark, NJ ......................................................................................... 65 

Statement of Scott Peden, President, Life Partners, Incorporated, Waco, TX ... 78 

Statement of Michael Freedman, Senior Vice President, Government Affairs, 

Coventry, Fort Washington, PA .......................................................................... 87 

APPENDIX 

Mary Beth Senkewicz, Florida Office of Insurance Regulation Response to 

Senator Specter’s Question .................................................................................. 105 

James Avery, ACLI Response to Senator Specter’s Question .............................. 105 

Summary of Committee Investigations submitted by the Aging Committee 

Majority Staff ....................................................................................................... 107 

Additional information from Coventry ................................................................... 118 

Additional information from Mary Beth Senkewicz, Office of Insurance Regulation ..................................................................................................................... 140

Letter and additional information from the State of Wisconsin, Office of 

the Commissioner of Insurance .......................................................................... 189 

Letter from the National Conference of Insurance Legislators ........................... 194 

Letter from the Life Insurance Settlement Association ....................................... 196 

Letter from the Association for Advanced Life Underwriting ............................. 209 

Statement from The National Association of Insurance and Financial Advisors 

(NAIFA) ................................................................................................................. 211 

Testimony of Mary Jo Hudson, Director of the Ohio Department of Insurance 215 

Statement of Joseph M. Belth, Professor Emeritus of Insurance in the Kelley 

School of Business at Indiana University .......................................................... 225 

Testimony submitted by the State of New York Insurance Department ............ 230 

(III) 

(1) 

BETTING ON DEATH IN THE LIFE SETTLEMENT MARKET: WHAT’S AT STAKE FOR SENIORS? 

WEDNESDAY, APRIL 29, 2009 

U.S. SENATE, 

SPECIAL COMMITTEE ON AGING, 

Washington, DC. 

The Committee met, pursuant to notice, at 2:09 p.m. in room 

SD–106, Dirksen Senate Office Building, Hon. Herb Kohl (chairman of the committee) presiding. 

Present: Senators Kohl [presiding], Udall, and Martinez. 

OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN 

The CHAIRMAN. Good afternoon to everybody, and thank you very 

much for coming to this hearing this afternoon. 

In today’s tough economic climate, millions of seniors have lost 

a big part of their retirement and investments in only a matter of 

months. Unlike younger Americans, they do not have time to wait 

for the markets to rebound in order to recoup a lifetime of savings. 

For many, this means postponing retirement, or even returning 

to work in a difficult employment market, often staked against 

older workers. Needless to say, seniors are looking for ways to bolster their sagging savings. 

Often they find that the most valuable asset they can afford to 

part with is their life insurance policy, which can have substantial 

cash value. New alternatives have become available for those who 

no longer have a need for their life insurance policy. 

One of them is the life settlement business, a burgeoning, multibillion dollar industry that has exploded in recent years. Life settlements can be a worthy alternative for seniors who are considering the sale of their life insurance policy, and offer a higher payment in the cash surrender value offered by the insurance company. 

Today, we’re here to inform seniors that selling one’s life insurance policy is a complex transaction that can be filled with hidden 

pitfalls. 

Over the last 9 months, Committee staff interviewed many honest and competent players in this industry. But as with any industry that balloons over a short period of time, there are sales practices and regulatory loopholes that need to be examined in the interest of seniors and consumers, at large. 

2 

Several State regulators are here to talk about the sales and 

marketing abuses that they have seen at the hands of life settlement brokers, who—in some cases—received huge commissions. 

Many States, including my own State of Wisconsin, are working 

to implement legislation, or State regulations that would institute 

consumer safeguards. Initiatives include a requirement that brokers be licensed to sell life settlements, the establishment of guidelines for sales, marketing and promotional materials, and the mandatory disclosure of certain risks. 

For example, most seniors do not know that when they sell their 

policy, their health records can be passed off to multiple third parties as their policy is resold, time and again. 

Most seniors are also unaware of what their tax liabilities are, 

or that they may be uninsurable in the future. Furthermore, most 

seniors may not know that they are participating in insurance 

fraud if they purchase life insurance with the intent of flipping it 

for a life settlement. 

Known as ‘‘stranger-originated life insurance,’’ or STOLI, such 

scams have led to a spike in litigation since 2005. In Florida alone, 

insurers have filed three multi-million dollar Federal lawsuits in 

the past year, alleging that the true nature of the life insurance 

transactions were misrepresented. 

We’ll also examine how life settlements are being bundled, and 

sometimes used as risky investments by some of America’s largest 

investment companies. 

We’ll hear about the risks associated with purchasing investments backed by life settlements, and explain why they are not 

generally considered suitable for non-institutional investors. 

As States struggle to increase regulations and consumer protections, it’s crucial that the Federal role is made clear. I’ve sent a letter to the IRS, asking them to clarify the Tax Code with respect 

to life settlements, as the current lack of guidance may be creating 

loopholes. In a reply, Treasury Secretary Geigner stated that the 

Agency will soon publish tax guidance for people who sell their 

policies, and the investors who purchase them. 

We’ve also asked the Securities and Exchange Commission to 

state its position on whether life settlement investments should be 

considered securities, as most State regulators are treating them. 

Mary Shapiro, Chairman of the SEC, responded last night and 

clarified the SEC’s jurisdiction over most aspects of life settlement 

transactions. She also assured us that they will look into the regulation of life investment brokers. 

Finally, we’ve asked the Government Accountability Office to 

study the current size and scope of the life settlement market, and 

take a look at related consumer issues, as it’s clear that the industry is in need of more transparency and regulation, and we may be 

introducing legislation to address this issue. 

We thank you once again for being here today, we thank our witnesses for being here today. We now turn to Ranking Member Mel 

Martinez, for his opening statement. 

3 

STATEMENT OF SENATOR MEL MARTINEZ, RANKING MEMBER 

Senator MARTINEZ. Chairman, thank you very much, and thank 

you for calling this very, very important and timely hearing. 

In today’s turbulent economic environment, we want to preserve 

and protect seniors’ assets and their liquidity options, as well. 

We also want to ensure that primary and secondary financial 

markets are safe, transparent, efficiently regulated, and inspire investor confidence. 

I’d like to thank our panelists for joining us today to discuss 

issues impacting those contemplating a transaction involving life 

settlement firms. I’m also looking forward to hearing what States 

are doing to bolster investor protection in the wake of several life 

settlement firms being exposed as fraud schemes. 

It is my hope that we can bring greater attention to matters regulated by the States, to ensure both investor, and consumer, protection. 

We’ll also hear today from two firms engaged in the business of 

life settlements, and what they envision for their future, and the 

future of their industry. Speaking of what steps Congress, the 

States and regulators can contemplate to ensure consumers are 

fully appraised of their rights, and their obligations under such 

transactions. 

Also important to this committee is a complete discharge of fiduciary duties on the part of brokers and providers. 

Seniors should have comfort that they’re receiving the best value 

for their assets, and this opaque life settlement market. They also 

deserve full accountability and transparency when engaging in 

these types of transactions, and we will be monitoring practices as 

we go forward. 

Businesses practices, such as stranger-originated life insurance 

policies—or STOLIs, as mentioned by the Chairman—in my view 

are contrary to the fundamental precepts of the insurance market, 

and we would appreciate more on how to prevent these types of 

transactions. 

We also need to learn the real-world task practices surrounding 

these life settlement transactions, including the gains on sale, the 

taxability of the death benefits, and the fair and equitable treatment of all tax filers. 

Mr. Chairman, I want to ensure that those with a tax liability 

as a result of one of these transactions, No. 1, pays all of the taxes 

that they owe, and No. 2, that they be treated consistently, without 

regard to who prepared their return. In other words, I’d like to see 

a strong guidance from the IRS, and appropriate clarification, so 

that there is no ambiguities as to who owes what at what time. 

I look forward to learning more from today’s witnesses, and 

thank them all for appearing here with us today. Thank you. 

The CHAIRMAN. Thank you, Senator Martinez. 

We’d like now to introduce the members of our panel. 

Our first witness on the first panel today will be Stephan 

Leimberg, CEO of Leimberg Information Services, which does provide analysis and commentary for financial services professionals. 

He is also CEO of an estate and financial planning software company. Mr. Leimberg has written and lectured extensively on the 

4 

topic of life settlements, premium financing, and stranger-owned 

life insurance. 

Welcome. 

Our next witness will be Mary Beth Senkewicz, the Deputy Commissioner of Life and Health of Florida’s Office of Insurance Regulation. Ms. Senkewicz formerly served as Senior Health Policy 

Counsel, and Legislative Advisor to the National Association of Insurance Commissioners for over 11 years. She received her law degree from St. John’s University in New York City. 

Next we’ll be hearing from Michael McRaith, the Illinois Director 

of Insurance. Mr. McRaith has led several high-profile insurance 

fraud investigations for the State of Illinois. He belongs to the National Association of Insurance Commissioners Senior Issues Task 

Force, and has testified before numerous Congressional committees 

on insurance-related topics, including marketing and sales abuses 

by Medicare Advantage, and prescription drug plans. 

Finally, we’ll be hearing—on the first panel—from Fred Joseph, 

the Securities Commissioner for the State of Colorado. Mr. Joseph 

oversees the regulatory agency that licenses stock brokers, brokerage firms, and investment advisors in Colorado. He’s also President 

of the North American Securities Administrators Association, 

whose mission is to protect consumers who purchase securities, or 

investment advice. 

So, we welcome you all here today and we’d be delighted to take 

your testimony at this time. 

Mr. Leimberg. 

STATEMENT OF STEPHAN LEIMBERG, CEO, LEIMBERG INFORMATION SERVICES, INC., BRYN MAWR, PA AND AMELIA ISLAND, FL 

Mr. LEIMBERG. Legitimate, appropriate life settlements can benefit seniors. But I’ve been asked to discuss abuses. Here are six. 

First, no State requires a holdfold analysis. There’s no mandatory testing to see if a seller should ‘‘hold’’—that is, keep, or 

‘‘fold’’—that is, sell a policy. Without analysis, existing life insurance may be stripped away from a family when it should be kept. 

Second, rogue brokers, unscrupulous settlement companies rig 

bidding on policies. Sellers are cheated. 

Third, few States have modern settlement laws—it’s patchwork. 

Laws aren’t close to being uniform. So, rogue brokers change the 

legal location of a transaction to avoid a tough State’s laws. They 

move it to a lesser-regulated State, or to one with no law. Fortytwo percent of all 2008 settlements were in States with no settlement law. 

Fourth, disclosure. State regulators don’t have authority to require needed information on settlement companies’ ownership, operations, conduct, security, and any fraud procedures. Regulators 

have even been sued by big settlement companies who bully them 

from obtaining information essential to protecting seniors. 

Fifth, no State—let me repeat—no State specifically restricts who 

can buy an existing policy on a senior’s life. Once it’s sold, you have 

no say, no veto. There are no limits on how many times a policy 

can be resold, or to whom. You’ll never know who will own the policy on your life. No State has a staff that monitors buyers. So, 

5 

you’ll never be sure that the contract on your life will not end up 

in the wrong hands. 

Sixth, stranger-originated life insurance—STOLI. STOLI is a bet 

by strangers, a wager on how soon someone will die. Strangers 

can’t legally buy insurance on a person’s life, so like a teenager 

who finds and pays a homeless person to buy liquor, speculators 

line up, pay, and co-op seniors into lies and misrepresentations. 

The intent? Trick insurers into thinking the insurance is for the 

senior’s family. 

STOLI has already resulted in higher rates, stopped some insurers from issuing policies to seniors at all, and encourage seniors to 

aid and abet fraud. Unsavory settlement companies, more clever 

than ethical, enable STOLI by lobbying legislators to water down 

laws. Loopholes are inserted on the cynical pretense of defending 

property rights. Whose property rights? The very people co-opted 

into committing fraud to get the policy. 

What’s needed? No. 1, make a holdfold analysis mandatory. Require brokers to explain the advantages of keeping insurance. Require them to show sellers how much insurance is still needed. 

How can you make an informed decision that existing insurance is 

not needed, and should be sold, if no analysis has been performed? 

Require brokers to explain, in writing, alternatives to a sale. 

Second, demand transparency. Require brokers to disclose all offers, require them to shop and show spreadsheet offers from potential buyers. Sellers should be shown who was offered their policy— 

let them see for themselves if the policy was shopped competitively. 

Provide sellers a written statement, not only of what they net, but 

what the other parties get, so they can know if they’re being taken 

advantage of. Require settlement companies to provide more information to regulators, not less. 

Third, forbid individuals from buying policies. Restrict the types 

of institutions that can buy policies, and monitor them. 

Fourth, mandate licensing and rigorous continuing education. 

Fifth, enact modern and more uniform settlement laws. Prevent 

predators from taking transactions to States that let them do whatever they want to do . 

Six, give regulators broad examination and investigation powers. 

Enable them, and empower them, to seek injunctions, cease and 

desist orders, and impose meaningful fines and criminal fraud penalties. 

Seventh, stop STOLI. Use laws such as Iowa’s, North Dakota’s, 

the laws that are proposed in Oregon. 

My conclusion: insightful, effective law can’t wait. Why not? Because what is at stake is not merely a senior’s money. You can 

not—you must not—forget, we’re talking about a wager, a bet on 

a human’s life. The sooner the insured dies, the greater the investor’s profits. If it is your responsibility to develop, monitor, and enforce settlement laws, remember a senior’s life is, literally, in your 

hands. 

[The prepared statement of Mr. Leimberg follows:] 

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The CHAIRMAN. Thank you. 

Ms. Senkewicz. 

STATEMENT OF MARY BETH SENKEWICZ, DEPUTY COMMISSIONER, LIFE AND HEALTH INSURANCE, FLORIDA OFFICE 

OF INSURANCE REGULATION, TALLAHASSEE, FL 

Ms. SENKEWICZ. Thank you, Mr. Chairman. Good afternoon, and 

good afternoon Ranking Member Martinez, from the great State of 

Florida. 

My name is Mary Beth Senkewicz, I am the Deputy Insurance 

Commissioner for the Florida Office of Insurance Regulation, and 

on behalf of Commission Kevin McCarty and myself, I would like 

to thank you for inviting me to discuss the life settlement industry. 

To begin with, there is nothing inherently wrong with life settlements in and of themselves. It is well-settled law that insureds 

have a legitimate property right in their properly obtained life insurance. 

In fact, the industry began with a noble purpose. The first phase 

of these products began in the 1980’s and were marketed to AIDS 

patients who needed cash to defray medical expenses, and gain access to life-prolonging drugs. The problem now is the lack of transparency associated with these transactions. 

For example, in Florida, the industry opposed a proposal that 

would require a disclosure of all fees, including commissions associated with the transaction. Another general problem is that persons 

wanting to sell their policies have no easy way of knowing if they 

are getting the best deal they can. 

Our office has expended a tremendous amount of resources regulating this industry. To put it into perspective, Florida has issued 

licenses to 24 entities, which is now only 14 entities, due to revocations and surrendered licenses. 

Since 1996, the industry has incurred 18 different legal orders, 

2 administrative complaints, and 11 examinations or investigations 

resulting in additional consent orders, all with accompanying fines 

and costs of $1.95 million. This is especially egregious when considering this industry represents only 14 of the 3,900 entities regulated by our office. Every time we try to insert some transparency 

into the system, such as the bill we proposed for the 2009 legislation to consider, the industry fights us. We have also been sued 

several times when we try to enhance transparency by rule. 

Coventry First, LLC is a leader in this industry. After the State 

of New York sued Coventry, accusing the company of bid-rigging 

and other fraud in acquiring more than $3.6 billion worth of life 

insurance policies, we conducted our own investigation. 

We then issued a Notice and Order to Show Cause, alleging violations of the Florida insurance code, including using fraudulent 

and dishonest practices, transacting business in bad faith, and employing individuals shown to be untrustworthy or dishonest. 

Coventry denied the allegations, but ultimately entered into a 

consent order agreeing to pay $1.5 million. Thereafter, the Office 

notified Coventry of a follow-up examination. Coventry moved for 

a preliminary injunction in Federal district court, arguing that our 

office does not have the authority to examine its policies that relate 

to violators who reside outside of Florida. 

18 

On March 31, 2009, the Federal Court ruled in our favor, explicitly recognizing the State of Florida’s rights to examine all of Coventry’s books and records in order to evaluate its business practices 

as a whole. Coventry has appealed that decision. 

The newest development is called stranger-originated life insurance, or STOLIs. These transactions involve private investors soliciting elderly persons before they purchase a life insurance product. 

These promoters entice seniors to buy life insurance they might not 

otherwise have purchased. The motivation for seniors is not to access funds, but to profit on their ability to buy life insurance. 

But these transactions may harm seniors—they may exhaust 

their life insurance purchasing capability, and the cash payments 

for selling their policy might subject them to an unexpected tax liability. Seniors may also have to give the investor, and subsequent 

investors down the line, access to their confidential medical 

records. 

In conclusion, generally speaking, the life settlement industry 

needs far more transparency than it currently possesses. In particular, STOLIs provide little public benefit, or satisfy any legitimate financial need in the marketplace. These transactions exist 

solely to manufacture life insurance policies for profit. Those transactions can expose seniors to potential tax liabilities, policy rescissions, and traumatic litigation. These transactions subvert the 

original purpose of life insurance. 

Thank you. 

[The prepared statement of Ms. Senkewicz follows:] 

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The CHAIRMAN. Thank you, Ms. Senkewicz. 

Mr. McRaith. 

STATEMENT OF MICHAEL MCRAITH, DIRECTOR, DIVISION OF 

INSURANCE, ILLINOIS DEPARTMENT OF FINANCIAL AND 

PROFESSIONAL REGULATION, CHICAGO, IL 

Mr. MCRAITH. Chairman Kohl, Ranking Member Martinez, committee staff, thank you for inviting me to testify today. I’m Michael 

McRaith, Director of Insurance in the State of Illinois, and I speak 

today in that capacity. 

I congratulate this committee and the staff for focusing on the 

plight of our aging friends and neighbors who may fall prey to abusive life settlement practices. In 2007, Illinois had more than 6.9 

million individual life policies in force, and nearly 197,000 group 

policies, accounting for more than 5 million individual certificates. 

For us, the importance of life settlement regulation and transparency can not be overstated. Some argue that life settlement regulation illustrates a pro-insurance industry bias. This is false. It is 

not one industry versus another, the issue is consumer protection. 

To be clear, life settlements can be beneficial to individuals 

whose circumstances have changed, perhaps through divorce or terminal illness. When evaluating sales and marketing practices, our 

discussion must account for the retiree who worked hard, raised a 

family, saved whatever possible, but is not legally or financially sophisticated. 

With postponed retirements and depleted portfolios, and often 

with few employment options, our seniors need protection. Unwitting seniors may seek income through a stranger-owned life insurance scheme that imposes unexpected taxes, or lost public benefits. 

In Illinois, residents age 55 to 85 were invited to meet Mike 

Ditka, and learn why Wall Street wants to buy your annuity. Is 

there such a thing as free insurance? Are you in danger of outliving 

your life insurance? Ads like this prove that life settlements involve 

more than just the rich and the extremely wealthy. 

Our Department supervises any individual or entity involved 

with the business of insurance. Late in 2007, we subpoenaed 

records from Coventry First, so we could understand how the industry operates within our borders. 

Coventry filed suit to quash the subpoena arguing that it, Coventry, is beyond our regulatory reach. We prevailed at the trial 

court, and the suit is now on appeal. 

In Illinois, for 17 months, we have labored through legislative negotiations with the insurance and life settlement industries. Our 

legislators have been Herculean in bringing Illinois to the brink of 

regulation that includes a hybrid of the best practices from the 

NAIC model law, and other States. 

But we know Illinois law can not be molded to endorse, implicitly, the life settlement business model, because too much remains 

a mystery. Clearly, stranger-owned life insurance, or STOLI, violates a fundamental policy, premised on the tenant that a stranger 

should not want you to die. Our lives, regardless of age, should not 

be commoditized, packaged, and traded on Wall Street, like credit 

default swaps. 

34 

All responsible parties agree, STOLI should be banned. But as 

States, and as a nation, we lack answers to important questions, 

including who are the sources of capital for life settlements? What 

are the payment arrangements between the commercial parties? 

What are the roles and compensation for brokers, solicitors, promoters? Who are the life settlement consumers, and most importantly, what has been—or is—the impact of a life settlement on 

those individuals or their families? 

We regulate to protect consumers. That regulation must include 

measures to reduce the opaque hieroglyphics of the life settlement 

industry. With annual reporting, complete disclosure, and stringent 

oversight, we will protect our aging population. Life settlement 

deal-makers, including solicitors and promoters, must be licensed 

and subject to examination, penalties and revocation. 

Our economic crisis has been attributed to the failure of institutions and Federal regulators to understand assets and liabilities on 

which enormous institutional bets were placed. As this crisis 

proves, regulation must enhance transparency of otherwise mysterious financial products. 

As legislators and regulators, on behalf of our parents, our aging 

neighbors, friends, and constituents, we need unmitigated transparency in the business of life settlements. For these reasons, while 

actively engaged on a State level, Mr. Chairman, we pledge to support this special committee, and offer our support for your continued efforts. 

Thank you for your attention. I look forward to your questions. 

[The prepared statement of Mr. McRaith follows:] 

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The CHAIRMAN. Thank you, Mr. McRaith. 

Mr. Joseph. 

STATEMENT OF FRED JOSEPH, COMMISSIONER, DIVISION OF 

SECURITIES, COLORADO DEPARTMENT OF REGULATORY 

AGENCIES, ON BEHALF OF NORTH AMERICAN SECURITIES 

ADMINISTRATORS ASSOCIATION, DENVER, CO 

Mr. JOSEPH. Thank you, Chairman Kohl, Ranking Member Martinez, and committee staff. I’m honored to be here today to discuss 

the impact life settlements have on our citizens, and the need for 

strong regulation of these financial products by the appropriate 

regulatory authorities. 

Over the years, the North American Securities Administrator Association, or NASAA, and its members have been extremely active 

in dealing with the problems associated with viatical and life settlement investments, terms that have become interchangeable. 

At the outset of my testimony, I’d like to offer 3 general principles that I believe should guide legislators and regulators as they 

address the continuing challenges arising from these products. 

First, life settlements are complex financial arrangements involving both securities and insurance transactions. Consequently, regulating them effectively requires a joint effort by securities and insurance regulators, each applying their laws and expertise to different aspects of the product. 

Second, although life settlements may serve a useful purpose by 

enhancing the value and liquidity of life insurance policies, they 

also pose significant risk to policy holders and investors. For example, thousands of investors—many of them senior citizens—have 

been victimized through fraud and abuse in the sale of viatical and 

life settlements. Notwithstanding substantial successes by State securities regulators with their enforcement actions, and higher 

standards among industry participants; abuses continue. Diligent 

oversight of these products remains necessary. 

Finally, life settlements are constantly evolving in terms of product design, the policy holders involved, and the types of investors 

to whom they are marketed. Accordingly, lawmakers and regulators must carefully monitor these developments and respond to 

new challenges by creatively applying their existing laws and, 

where necessary, adopting new laws and regulations. This is one 

reason why I applaud the committee for convening this hearing 

today, and focusing attention on this important issue. 

Traditionally, viatical settlements have involved two distinct 

transactions. In one, the viatical settlement provider pays the insured some portion of his or her death benefit, in exchange for an 

assignment of the sale of the insurance policy to the provider. This 

is an insurance transaction, properly regulated under State insurance law. 

In the other, the provider arranges for interest in the settled 

policies to be sold to investors, with the promise of returns to be 

paid upon the death of the insured. This is a securities transaction, 

properly regulated by our State and Federal securities laws. The 

offer and sale of investments in viatical settlements has been 

marked by a wide range of fraudulent practices, and these abuses 

have been documented in scores of enforcement actions by securiVerDate Nov 24 2008 10:22 Oct 02, 2009 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 H:\DOCS\51547.TXT SAG PsN: JOYCE
48 

ties regulators over the years, as well as scholarly articles profiling 

the industry. 

In addition, in classic Ponzi schemes, promoters have used fraudulent life expectancy evaluations that are prepared by captive physicians, inadequate premium reserves, and false promises of large 

profits with minimal risk. 

In short, while viatical transactions have helped some people obtain funds needed for medical expenses and other things, those 

benefits have come at a high price for investors, many of them senior citizens. To address these problems, State regulators and the 

SEC have fought strenuously to regulate viatical settlements under 

securities laws. Those laws require sales agents to be screened, licensed, and tested. Promoters must register their offerings with securities regulators, and make detailed disclosures to investors. The 

securities law impose strong financial anti-fraud standards, and 

they provide remedies to deter violations. 

Using these laws, securities regulators have significantly reduced 

the incidence of fraud in the securities market. But our members 

continue to see evidence of bad actors that once characterized the 

entire industry. 

For example, in May 2007, my office in Colorado filed an enforcement action against a company called Life Partners, and its affiliates and agents. We alleged that for 3 years, the defendants sold 

unregistered viatical settlement investments to over 100 Colorado 

investors, netting over $11 million. We also alleged that Life Partners’ sales agents were unlicensed, they marketed the investments 

using fraudulent misrepresentations. 

In December of last year, the District Court held that the offerings were unregistered securities, marketed through unlicensed 

agents. Life Partners subsequently stipulated to a permanent injunction, and agreed to make rescission offers to all Colorado investors. 

The viatical settlement industry has changed significantly since 

its early days, and it continues to evolve in terms of viators, investors and industry participants. For example, the role of institutional investors have become increasingly prominent in the life settlement market. Along with this development is a desire among 

some life settlement companies to raise standards of conduct, promote sound regulation, and establish a legitimate industry sector, 

untainted by past abuses. 

In conclusion, lawmakers and regulators must follow all of these 

trends and must be prepared to acknowledge improvements in the 

industry, but also to address any new threats to viators and investors that may arise. 

I look forward to the findings of the committee in this important 

area of financial services regulation, and I thank you, again, for the 

opportunity to share my views. 

[The prepared statement of Mr. Joseph follows:] 

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The CHAIRMAN. Thank you, Mr. Joseph. 

I believe that each of you, in your own good way, has demonstrated and testified today that the life settlement industry is a 

legitimate industry, albeit a new one. That it has a real place in 

the market under certain circumstances, but that because it is new, 

and growing as quickly as it is, it is not sufficiently regulated in 

order to see to it that we protect consumers to the extent that they 

fully deserve. Thats, what we need to do is take a careful look at 

this industry, and provide the kind of oversight and regulations 

that will ensure that those people who participate in life settlement 

situations are fully protected. Is that a fair statement? 

[Panelists nod in agreement.] 

The CHAIRMAN. Anybody disagree with that in any way? 

Mr. JOSEPH. Senator. 

The CHAIRMAN. Mr. Joseph. 

Mr. JOSEPH. There have been problems in the past, from the securities side of the transaction. At least from the outset there were 

companies involved some are no longer with us, obviously, that conducted their business in a fraudulent manner; the policies didn’t 

exist, or the returns that they touted were outlandish, and that 

sort of thing, from the securities side of the transaction. So, I will 

say that from the outset. 

The CHAIRMAN. There’s room for outright fraud and dishonesty? 

Mr. JOSEPH. Absolutely. Absolutely. In some cases, prison sentences were imposed on the perpetrators. 

The CHAIRMAN. Senator Martinez. 

Senator MARTINEZ. Well, thank you, Mr. Chairman, and I want 

to thank all of the witnesses for very thoughtful statements and 

very enlightening information that you’ve shared with us. 

Let me see if I may have a couple of questions for Mr. Leimberg. 

I wanted to ask, where do you believe is the greatest opportunity 

for consumers to be harmed in these kinds of settlement transactions? 

Mr. LEIMBERG. I think the single-biggest harm is the taking 

away of a life insurance policy that is really needed. If there is no 

holdfold analysis, if there is no analysis of ‘‘what do you need?’’ before you take it away, if you merely give them a set of cookbook 

statements of, ‘‘Here are the possible things that can go wrong,’’ 

and fold up your tent—if there is no analysis, people will lose life 

insurance they really need to keep. 

Senator MARTINEZ. How would you propose that that hold or fold 

analysis take place? Would Ms. Senkewicz, in your office, would 

they—would you do that kind of an analysis? Or would there have 

to be a certification that that has been explained to the customer, 

and that you’ve got like a form that you’ve filled out, with certain 

questions asked and answered? 

Mr. LEIMBERG. A needs analysis is the first thing a good life insurance agent will do. 

Senator MARTINEZ. Yeah, but how can you impose that on the industry, is what I’m saying. I mean, is there a set of regulations you 

propose, or—? 

Mr. LEIMBERG. Well, certainly you can demand that— 

Senator MARTINEZ. I mean, that could be a good business practice— 

62 

Mr. LEIMBERG [continuing]. State law could require that practice 

be done, and that they—the documents be kept in the hands of the 

client, and perhaps in the hands of the broker, as well, and perhaps even the settlement company itself might demand a copy, just 

to satisfy itself that a needs analysis has been done. 

Senator MARTINEZ. Ms. Senkewicz, any comment on that issue? 

Ms. SENKEWICZ. Thank you, Senator. 

Yes, it would have to be spelled out in Florida statute, because 

this industry has made it abundantly clear to our office that unless 

it is spelled out specifically in statute, we enforce the statutes of 

the State of Florida, we don’t make them—it would have to be 

spelled out, because it’s abundantly clear that if we tried to do it 

without it being spelled out in statute, they’d haul us right into 

court. 

Senator MARTINEZ. Do you believe that there is enough—obviously, the State of Florida has some laws in place, I heard from Mr. 

Leimberg that there—42 percent of these transactions take place in 

States with no regulation, whatsoever. We do, in Florida, have a 

set of statutes that regulate the industry, correct? 

Ms. SENKEWICZ. We do have a set of statutes. 

Senator MARTINEZ. I’d like to ask all of the panel members, 

though, do you believe that there is a need for a set of minimal 

guidelines, regulations, that come at the Federal level, for the industry? I realize that longstanding tradition of insurance being a 

State issue, and how jealously Insurance Commissioner’s Offices 

guard that, and so forth, but is there—in this instance—some sort 

of a minimal Federal requirement? I’d like to get an answer from 

each of you on that. 

Mr. Joseph, you go ahead and start—we’ll take it from the right 

to the left. 

Mr. JOSEPH. Senator Martinez, thanks. 

With regard to the securities side of the transaction, obviously 

the SEC has a great interest in this area. I believe the Chairman 

of the SEC responded to Senator Kohl in a letter. Traditionally, 

we’ve approached these things using investment contract law to define a viatical investment as a security. However, four years ago, 

in Colorado, our law—our definition of security actually was 

amended to include the term ‘‘viatical settlement investments.’’ 

I believe, if you really want to help the securities side of it, at 

the Federal level, the law should be amended in the Securities Act 

of 1933, amend the definition to specifically state that a viatical 

settlement investment is a security, period. That way, it doesn’t 

have to be argued under investment contract law, and the vagueness therein. 

Senator MARTINEZ. Mr. McRaith. 

Mr. MCRAITH. Sir, Senator, if I could go back to your initial question very briefly— 

Senator MARTINEZ. Sure. 

Mr. MCRAITH. I think the biggest potential harm is when a policy is sold or disposed at lower value than what it should be. Because all of those lawful life settlements that might have legitimate 

benefits for our aging population, there is no guarantee right now 

that that senior or that individual policy holder is being compensated for that policy at a fair market value. 

63 

That’s where I think the largest harm is at that point, and I’m 

not going to quibble with Mr. Leimberg, he’s clearly an expert, who 

I have great respect for. 

In terms of whether there should be a— 

Senator MARTINEZ. Well, let me go back on that. When you talk 

about that issue, how does one—in other words, there—I’ve been 

told, I understand that typically these settlements would be for a 

larger amount than what the person could turn the policy back into 

the company for. 

Mr. MCRAITH. That’s right. The problem is, we don’t know the 

food chain, so to speak. We don’t know who’s being compensated, 

and at what rate, in the evolution of that from the gentleman who 

lives on Maple Street in Tallahassee, FL, as that policy works its 

way into a bundle of policies that’s being disposed of Wall Street. 

We don’t know—there’s something in it for everybody along that 

food chain, so to speak, Senator, and what we don’t know is whether Mr. Jones on Maple Street is getting the best return on that policy that he should, or is the compensation to him being reduced up 

front, so that the returns to the people—the other participants in 

that deal—receive enhanced compensation. 

There’s absolutely no clarity of that—on these transactions— 

there’s no transparency about how these transactions actually 

work, mechanically, and who’s getting paid what. There’s no assurance that Mr. Jones on Maple Street is getting the best deal he 

should—maybe for a policy he’s paid for, through premiums, for 

decades, in some cases. 

So, to address your second question about whether there should 

be a Federal minimum standard, I think the first challenge as both 

of you well know, is helping people understand what we’re talking 

about. I’ve worked with our legislature in Springfield, as I alluded 

to, for 17 months—these are complicated transactions. Insurance, 

generally speaking, is not something people talk about at cocktail 

parties. 

But then, when we start talking about life settlements, and what 

that means, eyes will frequently glaze over, and people have, generally, trouble understanding. So, the work of this committee, in 

raising attention, raising the profile of the importance of this topic, 

is something that I think is a real important national Federal first 

step to deal with these issues at a State level. 

Senator MARTINEZ. I’ll go back to you, Mr. Chair. 

The CHAIRMAN. I think so, and that’s precisely why, as you’re 

suggesting, that we have this hearing today, and we begin to highlight the industry and the potential pitfalls. 

But I think we’re all agreeing that it’s one thing to highlight the 

industry, and the kinds of things that can happen to adversely affect people which, while absolutely necessary. From there, to go to 

proper regulation, is a whole other step, which has to be taken. 

Isn’t that right, Mr. McRaith? 

Mr. MCRAITH. I would agree with that, yes. Absolutely, Mr. 

Chairman. 

The CHAIRMAN. Do all of you feel that we’re a long way from 

there? A long, long way? 

64 

Mr. LEIMBERG. Absolutely. Absolutely. I think that bad actors 

will find cracks in State laws, and they will exploit them to their 

fullest extent. 

What we’ve got right now is a patchwork of State laws, and I 

don’t see anything but a patchwork of State laws. So, without some 

kind of Federal oversight, we’re going to continue that patchwork, 

and the bad actors will drive a truck right through it. 

The CHAIRMAN. Well, let’s ask the other panelists about that. 

You’re suggesting that the State laws we have, the patchwork of 

State laws we’ve had are not adequate, that we need Federal regulation to begin with, to be followed by adequate State regulation. 

Is that right? 

Ms. SENKEWICZ. Mr. Chairman, if I might address that question. 

I believe the Senator’s question may have also been instigated by 

something in my testimony where it did—at least on the STOLI 

level—allude to, perhaps, banning it at the Federal level. 

But, I must admit, that statement is borne somewhat of frustration in the difficulty we’ve had in Florida in passing what we consider, at the Office of Insurance Regulation, inadequate viatical, or 

life settlement law. The fact is, as I stated in my written testimony, 

the office introduced a bill to enhance both the reporting, the disclosures, strictly on the viatical, or life settlement side, plus the 

measures to address STOLI, and the industry came back with, did 

not support us in that effort, hired lobbyists, and came back, in 

fact, with an alternative draft that was put forth as being an adequate STOLI bill, but in fact, if you read it very carefully, gutted 

what we were even doing—that little that we were able to do. 

So I would suggest that there has been some difficulty at the 

State level. So, if the States were aware, and industry aware that 

Congress—yes, you really are interested in this, and that perhaps 

a few years down the road, if the States have not been able to 

adopt the NAIC model, for example, across the board, to adequately 

protect consumers from some of these issues, then I think that that 

would be fair warning. 

The CHAIRMAN. Mr. McRaith. 

Mr. MCRAITH. Yes, Mr. Chairman. 

Just to follow up—there will always be bad actors who will always evade any regulation that’s in place—we know that. I think 

the first key to any successful regulation is reporting and accountability so we can track how the industry evolves. As you well know, this industry has evolved from a $2 billion industry at the beginning of this decade to over—some estimates are 

over $30 billion right now—it’s evolving, quickly. The important 

thing is, do we have the information so we can make informed public policy decisions, going forward. 

The CHAIRMAN. Yes, Mr. Joseph? 

Mr. JOSEPH. Senator Kohl, if I could just speak briefly, in Colorado—just in Colorado only, when we passed our law, four years 

ago, it was a dual act, it addressed insurance, primarily, and then 

at the very end it spoke to the securities part, where it changed 

the definition of security in our law. 

Actually, I believe—and I’d like to offer this to your committee 

staff to look at it—I believe it’s a good roadmap as to, perhaps, 

what approach should be taken. I’m not willing to, totally say that, 

65 

at the State level, that we can’t handle it, because I believe—at 

least in our State—we’re dealing with it based on the law that we 

have in place. So, I’m pleased with the way it works. 

The CHAIRMAN. Any other comments from the first panel? Questions? 

Senator MARTINEZ. None from me, sir, but I want to thank the 

panel for insightful information. 

Mr. MCRAITH. Thank you. 

The CHAIRMAN. You’ve provided some really important information to us today, and enlightenment, and so we thank you for being 

here. 

Mr. MCRAITH. Thank you very much. 

The CHAIRMAN. Thank you so much. 

The first witness on this second panel will be James Avery. Mr. 

Avery is President of Individual Life Insurance at Prudential. In 

2007, Mr. Avery became chairman of the Life Insurance Committee 

of the American Council of Life Insurance, known as ACLI. 

He’s also a member of the ACLI CEO Taskforce on Secondary 

Markets. Mr. Avery is a Fellow of the Society of Actuaries, and a 

member of the American Academy of Actuaries. 

Our next witness will be Scott Peden, General Counsel and Secretary of Life Partners Holdings and the President and Chief Operating Officer of its primary operating subsidiary, Life Partners, Inc. 

Mr. Peden has worked on legislation and regulation for the protection of all parties in the transaction of life settlements, and he’s 

testified before the National Council of Insurance Legislators, and 

State insurance committees and regulators. 

Finally, we’ll be hearing from Michael Freedman, Senior Vice 

President of Government Affairs for Coventry First, the country’s 

leading purchaser of life settlements. 

Prior to joining Coventry, Mr. Freedman served as Vice President of Public Affairs and Public Policy for Global Crossing, Limited. He also previously served as Associate Attorney in New York 

and received his law degree from the University of Buffalo. 

We thank you all for being here. Mr. Avery, we’ll take your testimony. 

STATEMENT OF JAMES AVERY, JR., PRESIDENT, INDIVIDUAL 

LIFE FOR PRUDENTIAL FINANCIAL, ON BEHALF OF AMERICAN COUNCIL OF LIFE INSURERS, NEWARK, NJ 

Mr. AVERY. Good afternoon, Chairman Kohl, and Ranking Member Martinez and committee staff. I thank you for inviting me here 

to discuss the exposure of senior citizens to abusive life settlement 

practices. 

As you know, for centuries, life insurance has served as a valuable economic instrument, protecting families and businesses from 

the potentially devastating financial impact of an untimely death. 

Now, my comments here today are going to be limited to just a 

sub-set of life settlements which are really predatory schemes designed—in our opinion—to subvert the true purpose of life insurance. The schemes are intended solely to enrich both the intermediaries who initiate them, and investors, who are looking for 

above-market returns. 

66 

Called stranger-owned life insurance—as already referenced, or 

known as, STOLI—they are fraudulent and they are contrary to 

both public policy and State law, which require life insurance policy owners—or beneficiaries, for that matter—to have an initial insurable interest in the continued life of the insured. 

Quite to the contrary, STOLI policy owners and beneficiaries 

have an interest only in the death of the insured. Quite frankly, 

the sooner the better. 

Vulnerable seniors are lured into these schemes with offers of 

free insurance for a couple of years, along with promises of cash 

incentives, free meals, and even vacations. They may be asked to 

sign applications that grossly misrepresent the current condition of 

their health, or their income, and even their net worth. The senior 

may also wind up signing documents, which unknowingly make 

them responsible for extremely large loans, with high interest 

rates, to fund the initial premiums on the so-called ‘‘free’’ insurance. 

The stranger, or speculator, initiating the transaction is actually 

attempting to cherry-pick the individuals with the shortest life expectancy, and thereby arbitrage the pricing assumptions that the 

insurance providers is using. 

Now, after a two-year contestability period, when the insurer can 

no longer rescind the coverage due to fraud or misrepresentation, 

the senior is usually faced with two options. They can either repay 

the loan that was used to fund the initial premiums—at a significant cost, usually hundreds of thousands of dollars—or they can 

sign over the life insurance policy as to the speculator, in full satisfaction of the loan. As you might imagine, the senior really generally only has the latter as their choice. 

The policy is then packaged into a death bond and sold to investors. As part of the scheme, the senior must agree to periodic phone 

calls or visits, to monitor his or her own continued existence. Sadly 

enough, if life expectancy is less than a year, these grim reaper 

calls can occur as frequently as monthly. 

Now, many of your constituents, in society overall, are in fact 

harmed by STOLI schemes. First, the victimized senior is usually 

unintentionally participating in what is a fraud. The senior may be 

responsible for undisclosed taxes, as was mentioned, on the economic value of the free coverage, the forgiveness of the loan, as 

well as any other incentives that they’ve accepted as part of the arrangement. 

There’s actually no guarantee, in fact, that the speculator will acquire the policy after two years. They can change their mind. It 

may be that the senior’s health has improved, or that the speculator no longer has the funds to pay the future premiums that will 

be required. They can walk away, and in some cases, the senior 

may be responsible for the outstanding loan. 

The senior may be ineligible for additional life insurance coverage that they need for their own benefit—either for their beneficiaries, or for their estate planning, or to support other beneficiaries, because the investor is now holding all of the coverage 

that they may be entitled to buy from the insurance industry. 

67 

Yet, the financial markets are maybe once again exposed to another sub-prime-like securitization scheme, which really only benefits the intermediaries, as we’ve learned. 

The life insurance industry strongly supports legislation to stop 

STOLI, but it has faced stiff opposition, as you’ve heard earlier, 

from settlement providers, premium finance companies, and the investors. 

The State legislators are continually told that life insurance is 

not being sold for investors. However, I will tell you—many investigations and court cases have provided evidence to the contrary. 

In fact, I will share with you one of many examples. 

At my own company, Prudential, we uncovered a case last August, after Ohio had passed a very effective law prohibiting all 

STOLI. It involved a 74-year-old woman who was driven from her 

home in Cleveland, OH, to Pittsburgh, PA, which has no such law, 

for a medical exam, and to sign an insurance application. 

When she was interviewed by our investigator, she was shocked 

to learn that the death benefit on the policy that she applied for 

was $9 million. She was shocked, because her and her husband’s 

monthly income was $950 from Social Security and they had a total 

net worth of $2,000. Needless to say, once she learned what had 

been undertaken, she was very concerned for her own personal 

safety. This is one of many such examples. 

Now, as you probably know, insurers design, and they price their 

policies, using averages to assess the probability of death, surrender, and lapsation of coverage, over the life of a large book of 

business. While those who are fortunate enough to live long lives 

may enjoy the peace of mind of knowing that their family or business had been protected financially, they are also the ones that 

fund the early death benefits to the unfortunate ones who die an 

early death, that suffer an early death. That’s how all insurance 

works. 

This is not the case with STOLI. The investors hope to realize 

an above-average return by buying policies only on the lives of 

those selected individuals who they expect—and hope—will die 

early. History suggests that if they are successful at these transactions, they will be undermining the ability of the life insurance 

providers to offer legitimate and needed coverage to responsible 

citizens. 

In conclusion, the life insurance industry is working hard to get 

legislation passed in each and every State, to prohibit all forms of 

STOLI, and to ensure that life insurance continues to be readily 

available, on an appropriate, and an affordable basis. 

I, again, thank the committee for this opportunity to testify on 

behalf of the insurance industry, and we are hopeful that this hearing, and the findings that you bring forth, will encourage all State 

legislators to continue efforts to curb this abusive practice, which 

is a threat to all of your constituents, and especially the senior citizens. 

Thank you. 

[The prepared statement of Mr. Avery, Jr. follows:] 

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The CHAIRMAN. Thank you, Mr. Avery. 

Mr. Peden. 

STATEMENT OF SCOTT PEDEN, PRESIDENT, LIFE PARTNERS, 

INCORPORATED, WACO, TX 

Mr. PEDEN. Mr. Chairman, Senator Martinez and members of 

the committee, I’m honored to testify in front of you today as an 

industry representative, on behalf of Life Partners, Inc., as this 

panel examines the life settlement industry. I appreciate the work 

of this committee in protecting the interests of our parents and our 

grandparents. 

Life Partners is the oldest, and the only publicly traded provider 

in the life settlement industry. The typical policy that is presented 

to Life Partners is $1 million to $10 million in face, and is owned 

either by a legal entity—such as an insurance trust—or by financially sophisticated individual. 

As is apparent, most senior Americans do not own the type of 

large-face policies that I’m referring to. The policy owners that Life 

Partners deals with are financially sophisticated seniors. 

The life settlement industry provides a private sector solution to 

a public sector problem—that is, illiquidity among senior Americans. Prior to the establishment of our industry, policies which are 

now sold would simply have been abandoned, and the inherent 

value in those policies given up as windfall profits to life insurance 

companies. 

Now, the liquidity needs of these seniors are being met, privately, discretely, and in a manner that is beneficial to both the 

purchaser and the seller. We ask nothing more than for insurance 

companies to fulfill these contracts into which they freely entered. 

Unfortunately, the life insurance lobby has promoted State legislation to deter these life settlements, and help them retain their 

windfall profits. The insurance lobby is extremely well-financed 

and influential, but it is not looking out for the best interests of 

American seniors. That is unfair, and extremely detrimental to policy owners. 

Now, let me address some of the issues that the committee is 

specifically investigating. No. 1, the issue of soliciting seniors to 

purchase policies for a later sale. 

We know that there is a concern for senior citizens who might 

fall victim to arrangements in which they are paid to purchase a 

policy with a contemporaneous arrangement to sell it, at a future 

date. This, so called, investor-initiated life insurance, or strangerinitiated life insurance, is a practice which Life Partners has never 

engaged in. But it is important to note that this is an agent supervision issue—not a live settlement issue. 

Insurance agents should assess the true needs of consumers, and 

should answer all application questions truthfully. But, it is up to 

the insurance companies to make sure that their agents follows 

these rules. Then, if the insurance company chooses to issue a policy, they do so with the full knowledge that the United States constitution permits that policy owner to sell the policy at some point 

in the future. 

No. 2, the regulation of live settlement brokers, and their commissions. A live settlement broker offers valuable advice and servVerDate Nov 24 2008 10:22 Oct 02, 2009 Jkt 000000 PO 00000 Frm 00084 Fmt 6633 Sfmt 6633 H:\DOCS\51547.TXT SAG PsN: JOYCE
79 

ices to their clients, and they deserve to be compensated for it. 

However, unlike our company, they represent the policy owner. 

Uniform, Federal regulation may be appropriate in order to protect 

those who are financially unsophisticated. 

No. 3, State versus Federal laws a regulations. Article I, section 

8 of the United States Constitution authorizes Congress to regulate 

commerce among the several State. Most life settlement transactions are interstate in character, sometimes involving a number 

of different States. The burden of complying with a patchwork of 

conflicting State laws only raises costs, and lowers the ultimate 

value paid to policy owners. 

Of course, State legislators can certainly regulate intrastate 

transactions, but the jurisdiction of State legislatures must end at 

their borders, and States’ efforts to extend their jurisdiction beyond 

their borders, and venture into congressional jurisdiction, must be 

clearly and completely preempted. 

No. 4, clarifying the tax liabilities arising out of a life settlement 

transaction. We would urge the committee to consider legislation 

which clearly defines any tax liability for policy owners. We believe 

that the proceeds from a life settlement should be treated as a capital gain or loss, based on the difference between the total amount 

of premiums paid for the policy and the amount of proceeds from 

the sale. 

Our overall recommendations to Congress for dealing with the 

life settlement industry are as follows: First of all, recognize that 

the secondary market for life insurance is not the business of insurance, and should be regulated differently than our insurance companies. 

No. 2, passing legislation which expressly federally preempts the 

entire field, establishing a uniform set of life settlement regulations 

at the Federal level, at least for interstate transactions. This will 

promote interstate commerce, reduce uncertainty, and provide 

value to seniors who want to sell their policies. 

Also, it should recognize that many of the reported abuses or 

problems with the issuance of policies to unqualified insureds, rests 

with practices of insurance agents, and insurance companies—not 

with life settlement companies. 

Recognizing that strict regulation may not be appropriate or necessary for accredited or sophisticated insurance consumers, and establishing an appropriate regulatory construct that recognizes a 

distinction between ordinary insurance consumers, and those who 

are financially sophisticated. 

Mr. Chairman, Senator Martinez, it has been a privilege to offer 

our company’s perspective on the life settlement industry. Life 

Partners has a firm commitment to protecting unsophisticated policy owners, and preserving the property rights of all senior Americans. We appreciate your consideration, and look forward to your 

questions. 

[The prepared statement of Mr. Peden follows:] 

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The CHAIRMAN. Thank you, Mr. Peden. 

Mr. Freedman. 

STATEMENT OF MICHAEL FREEDMAN, SENIOR VICE PRESIDENT, GOVERNMENT AFFAIRS, COVENTRY, FORT WASHINGTON, PA 

Mr. FREEDMAN. Chairman Kohl, Senator Martinez, my name is 

Michael Freedman, I am the Senior Vice President of Government 

Affairs for Coventry First. I appreciate the opportunity to testify 

before the committee, and especially appreciate the committee’s interest in the secondary market for life insurance, and life settlements, specifically, and the question, what’s at stake for seniors? 

I’m pleased to share my views on that subject today. 

As the market for life settlement develops, a lot is at stake for 

consumers. One of the most significant of these issues is whether 

consumers will be able to realize the fair market value for their 

policies. 

Until recently, policy owners had two options for divesting 

unneeded, underperforming, or unaffordable policies. Stop paying 

premiums and allow the policy to lapse, or surrender the policy. 

According to a leading international actuarial firm, approximately 88 percent of life insurance policies are surrendered or 

lapse without paying a death benefit. 

A policy surrender value is typically a small fraction of its market value, and the value paid by an insurer for a lapsed term policy 

is zero. 

Life settlements provide a valuable alternative to the lapse or 

surrender of a policy. They pay policy owners fair market value for 

their policies. These payments typically exceed the surrender value 

by many multiples. Coventry is a leading participant in that market, and we have paid policy owners approximately $2 billion in excess of surrender value of their policies. 

Coventry purchases policies mostly from sophisticated trusts, corporate entities, and high net-worth individuals who are represented by counsel and financial advisors. We believe that these 

policy owners’ decision to sell a policy should be properly performed. 

Coventry requires sellers to establish that they are sophisticated. 

We disclose to consumers alternatives to life settlements, including 

borrowing against their policies, cash value, and accelerated death 

benefits available under the policy. 

In addition, we inform prospective sellers that life settlements 

may have tax consequences, and advise them to seek professional 

advice before selling their policies. 

Of equal importance, Coventry strongly believes that consumers’ 

privacy must be protected. To that end, we had implemented extensive procedural safeguards that protect confidential financial and 

medical information of policy owners, and insureds. 

How do we protect what’s at stake for consumers? Coventry believes in a properly regulated life settlement market, with regulations that provide clarity, consistency, transparency, and a level 

playing field. We proactively support life settlement regulation 

across the United States. 

88 

The American Council of life Insurer’s has referred to Coventry 

as the ‘‘principal initiator of life settlement legislation in the 

States.’’ Today, 31 States regulate life settlements, and States such 

as California, New York and Illinois are in the process of enacting 

such laws this year. By the end of 2009, State law regulating life 

settlements are expected to cover nearly 90 percent of Americans. 

Coventry supports measures that prohibit stranger-originated life 

insurance. We do not condone STOLI transactions, and we have 

supported the legislation adopted in numerous States since the 

start of 2008, addressing STOLI. 

As we come together today to consider what’s at stake for consumers, I feel compelled to report that many insurance companies 

aggressively take steps to deprive consumers of access to this important market. It has been a common practice for insurers to prohibit their agents from informing policy holders about the option of 

a life settlement. Insurance companies have terminated agents for 

helping their customers sell their policies, leaving these consumers 

with few, if any, option beyond the lapse or surrender or those policies. 

Insurers have sought to rescind policies sold in the secondary 

market, and have imposed contractual restrictions on policy sales. 

Some have even refused to issue policies when a prospective policy 

owner indicates an awareness of the policy’s market value. Worse 

still, insurance companies have promoted legislation that has been 

criticized as anti-consumer and protectionist by State legislators 

and by consumer advocates. All of these efforts are calculated to 

protect corporate profits at the expense of consumers. 

Coventry supports fair competition in a market regulated to provide transparency for consumers and a fair playing field for business. Such a market is the best way to protect and provide the 

most value for consumers. 

I appreciate the opportunity to appear here today, and I’m available to answer any questions, Chairman Kohl. 

[The prepared statement of Mr. Freedman follows:] 

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The CHAIRMAN. Mr. Freedman, what actions has your firm taken 

to ensure that your brokers are not engaged in stranger-originated 

life insurance, known as STOLI? 

Mr. FREEDMAN. Mr. Chairman— 

The CHAIRMAN. Mr. Freedman, then we’ll hear from you, Mr. 

Avery. 

Mr. AVERY. Thank you, thank you. 

Mr. FREEDMAN. Mr. Chairman, as I indicated in my testimony, 

we do not condone STOLI. STOLI is a practice that hurts consumers, it hurts insurance companies, and it hurts the life settlement market. 

But, as Mr. Avery characterized it as a sub-set of life settlements, it’s not. It’s a sub-set of the sale of life insurance. Our companies don’t have the authority to write life insurance, but it’s the 

agents of the carriers that do. It is a problem at the inception of 

a policy, and not the assignment. 

As I’ve indicated, we have supported legislation primarily based 

on the National Conference of Insurance Legislators that provides 

targeted measures to attack STOLI where it occurs—at the inception of a policy. Measures to identify the schemes that are being 

used in premium finance transactions, transactions that are used 

to hide it in trust arrangements, to attack where it occurs, in the 

sale of life insurance. 

The CHAIRMAN. Mr. Avery, would you like to comment? 

Mr. AVERY. I would comment on a few points, here, if I may. 

First, at Prudential, which I will comment on, we attempt to understand the need for the insurance and the funding of insurance, 

and that we really are protecting someone who has an insurance 

need. If so, regardless of the funding, we will offer that insurance. 

If we think it is STOLI, we will not. 

In regards to one of the comments that I think both of the gentlemen made about windfall profits, and insurance companies trying 

to hold onto those, I think we all would agree—and I think the gentlemen here are equally smart to understand—is under a fire insurance policy, it is priced to pay claims on only those policies that 

result in a devastation of the home. 

Similar in life insurance—these are not windfall profits. Insurance companies price their policies to take into account hose policies that are expected to surrender and those, as they point out, 

that are expected to lapse. So, there really is no windfall profit 

issue, here, this is a function of what is taken into account in the 

pricing of the policy. 

The CHAIRMAN. Mr. Peden, you would like to see the patchwork 

of State regulations replaced by a Federal uniform law. What 

would such legislation include? Are there any State statutes that 

we might consider, at the Federal level? 

Mr. PEDEN. Well, at the risk of looking chauvinistic, Texas, I 

think, has a very good law, and certainly would serve as a fine 

model. I think the important thing is, if it is done on a uniform 

level—and that’s where we have the problem right now—it is 

patchwork because many of the States’ laws are conflicting. What 

we need is one set of rules that applies to interstate commerce. 

That is why I’ve promoted the Federal legislation which would then 

preempt the States from going off and doing their own things. 

94 

What I think is necessary is the recognition that the secondary 

market for life insurance is regulated in a different way than life 

insurance is done, and so it doesn’t necessarily take away from 

those States who want to regulate and have traditionally regulated 

life insurance companies. We’re not trying to do that. 

But we are trying to do is demystify and uncomplicate transactions, which have become unnecessarily complex because of this 

patchwork. If we have one set of rules, especially with regard to 

disclosures, with regard to what must be done, everybody knows 

the rules, and so we’re all singing off the same page. If you’re not, 

that leads to uncertainty, risk evaluation, which we have to price 

in, and the fact that you may not be able to sell your policy, at all. 

If you’re in a State which has onerous regulation and not very 

much business, you won’t be licensed in that State. So that deprives individual seniors who are there, who want to sell their policy, of the ability to access a market. 

Federal regulation, it seems to me, is the most effective and efficient way of being able to level the playing field, and make sure 

everybody knows what the rules are. 

The CHAIRMAN. Mr. Avery, Mr. Freedman, do you agree with 

what Mr. Peden—Mr. Freedman? 

Mr. FREEDMAN. Mr. Chairman, Senator Martinez, I believe that 

the story of regulating of life settlements has been a good story, 

simply because 6 years ago, 10 States had regulation. As we sit 

here today, 55 percent of Americans are covered by State regulation governing life settlement transactions. As I indicated in my 

testimony, with the passage, hopefully, of laws expected in California, New York, Illinois and other States, the number of—the 

percentage of Americans that will be covered by State regulation 

of life settlements would be close to 90 percent. That’s a good story. 

I think beyond that is that—the fact that consumers are wellprotected in the transaction, from the moment they say, ‘‘I think 

I want to sell my policy,’’ the law requires they deal with a licensed 

person, that companies like ours be licensed, that the transaction 

have lots and lots of transparency in that transaction. 

It’s important, too, that we have been able to reach the kind of 

consensus on legislation, around this country. Just in the last year 

and a half the life settlement industry, our company, and the life 

insurance industry have equally supported legislation in 14 different States. 

The most recent State that signed into law was Washington 

State. Unanimous support for that by all parties, it includes all the 

kinds of consumer protections I’m talking about, but importantly 

included also a protection to make sure consumers knew about 

their option to sell their policy, so that they weren’t left in the 

dark, so they weren’t being prevented from hearing about it, that’s 

the kind of legislation that we would support. The ACLI supported 

it, we supported it, and we think that’s a good model for the rest 

of the nation. 

The CHAIRMAN. Yes. 

Mr. Avery, would you comment? 

Mr. AVERY. Yes, we agree with Mr. Peden that different patchwork legislation is problematic, however we will state that both the 

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ference of Insurance Legislators Model Bill, are very good bills, and 

in fact together, we think they solve the issues that we’re discussing today. 

However, when we go State by State, we do find the settlement 

industry and the premium finance industry lobbying very hard for 

changes to those law or model acts that we think really water them 

down or create loopholes. That is what’s creating the patchwork. 

We do have model laws, that if adopted as designed either by the 

NAIC or NCOIL, or some combination thereof, we think effectively 

address the most egregious issues here. 

I will state that one of the things, that I think you highlighted 

in your opening comments, is the need for transparency, which I 

think all panel members agree. We need not just transparency at 

the individual transaction level, but we’ve heard issues earlier 

today about some of the industry fighting the ability to collect data 

on transactions undertaken. 

The latest transaction data that we’ve seen, and it’s from the settlement industry and it’s not total, it’s about one-sixth of the transactions, indicate to us, from their own data, that 50 percent or 

more of the policies that settled in 2008 were only in force between 

two and four years—or, I’m sorry—in force less than four years. 

Yet, when we talk about settlements, we think of people owning 

policies a long time and then not needing them. When you combine 

that with the comment that these tend to be large policies held by 

a trust the actual data, if we had it, would tell us, what’s the real 

essence of the transactions going on and are we dealing with people 

who have held insurance and no longer need it, and therefore have 

a commercial right to sell it? Or are we dealing with policies that 

were fabricated for the purpose of stranger-initiated life insurance? 

That would be very helpful. 

The CHAIRMAN. Good. 

Mr. Martinez. 

Senator MARTINEZ. Thank you, sir, I appreciate it. 

I would agree with you, Mr. Avery. I think that is a very healthy 

way of looking at it and that’s the kind of transparency that I think 

we have been discussing. Because I think we unanimously agree 

that STOLIs are bad, but yet they continue to exist and grow in 

numbers. So, I would ask you, and then other panel members, 

what are we going to do about it? How do we get it to stop? 

I think Mr. Freedman makes a good point, they’re at the tail end 

of the transactions—I have a lot of questions about that end of the 

transaction—but they don’t originate the policies in the first place. 

So, how does it happen? I mean, obviously they don’t write policies. 

You do, or your agents do. How do we improve that part of the 

equation? 

Mr. AVERY. Well, I’ll speak for a minute on behalf of Prudential 

and not the American Council Life Insurers. 

Senator MARTINEZ. But, speak on both. 

Mr. AVERY. OK, I—at Prudential we do not allow our agents to 

participate in these transactions and we spend a significant 

amount of money and resources policing this, which is not helpful, 

but we do it because we do believe these transactions are bad for 

the industry and the consumers as a whole, because that’s what we 

do. 

96 

I believe at the American Council, I think companies that are as 

concerned as we are on it are attempting to do the same thing, but 

it is patchwork and you do run into the legal side of how do you 

really find fraudulent transactions? 

As you might imagine, finding fraudulent transactions and proving them in a timely way is both expensive and is not fail-proof. 

So that is one of the reasons why we encourage legislation after, 

say, the NAIC Model Act and NCOIL Model Act, which we think 

would be effective. In the NCOIL Act, it makes STOLI a fraudulent 

act, which then can come with criminal and civil penalties, and we 

think that’s appropriate. 

Senator MARTINEZ. Mr. Peden, we know that the sellers of these 

kinds of policies can liable for tax liability, to the extent that they 

have a gain on the investment that they’re making. Does your firm 

disclose the potential for tax liability? 

Mr. PEDEN. We do. We make the similar kinds of disclosures, 

which agreements—contracts also do, we just suggest that they 

consult their tax advisor in that regard, because each person’s tax 

consequences may be different, depending on the circumstances. 

Senator MARTINEZ. Do you issue them a 1099? 

Mr. PEDEN. We do—the escrow agent that we use does issue the 

1099 in that regard. 

Senator MARTINEZ. Mr. Freedman, I am obviously concerned, as 

you would imagine, with the issue in Florida. Ms. Senkewicz spoke 

about that, and we discussed it as well. There seems to be a settlement that was undertaken as a result a number of transactions in 

the State of Florida. 

There was a resolution to this matter back 2007 and a consent 

order was entered. You agreed to adopt a business practice enhancement plan, is my understanding. You also agreed to pay $1.5 

million in connection with the Office of Insurance Commissioners 

Investigation and Examination, and agreed to future examinations. 

Now, Ms. Senkewicz told us here today that there is now litigation about whether or not they can look at your books and see 

whether your practices now are more in keeping with good business practices, Florida law, et cetera. It would seem to me that in 

good faith, your—your company would welcome this oversight. It 

would be part of what it takes to do business in the State of Florida. 

Rather than a motion for preliminary injunction, you should say, 

‘‘Here are the books, look them over. We want to be in compliance 

with Florida law, we want to have good business practices. We 

know we have a sordid record,’’ that you might disagree with what 

occurred, but you did enter into a settlement. 

There are questions that I think are very legitimate about your 

practices in New York. So, why wouldn’t you want to have Florida’s 

Insurance Commissioner looking at your books so that you can 

then go to Florida consumers and say, ‘‘We’ve got a good housekeeping seal of approval, our books have been opened to the State 

of Florida,’’ rather than litigate the matter? 

Mr. FREEDMAN. Senator Martinez, Coventry does strive to be in 

compliance with the laws, and particularly the laws in Florida. As 

you referenced, the Office of Insurance Regulation came to our 

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vestigated, looked at the company, concluded that investigation, as 

you indicated, with the consent order. There was a reimbursement 

for the costs of that investigation. There was no finding of wrongdoing, there was no penalty, there was no fine. 

They did come and say, ‘‘We want to do a market conduct exam.’’ 

As you can imagine— 

Senator MARTINEZ. You did agree to a business practice enhancement plan? 

Mr. FREEDMAN. Yes, sir. What we did in that is we provided— 

made permanent some voluntary improvements that we had made. 

Senator MARTINEZ. Did you not also agree to future examinations? 

Mr. FREEDMAN. Yes, sir. As the Department came to ask to do 

another examination, as you can imagine, our desire to comply— 

sometimes it runs into conflict with other laws, in that providing 

information under Florida would cause us to be in violation of laws 

in other States, particularly with respect to disclosure of transactions that don’t involve Florida policyholders, that would expose 

their sensitive personal medical and financial information from another State into Florida. 

We simply have asked— 

Senator MARTINEZ. Would you agree to provide the information 

on Florida policies with Florida policy holders and Florida citizens? 

Mr. FREEDMAN. Senator Martinez, yes, we did say that we would 

and we have provided that information on Florida policyholders already. The issue is a narrow one and it involves policy owners from 

out of State. We’ve asked the court to examine the Florida law on 

this matter. 

I think it’s important to note that the Office of Insurance Regulation itself can’t be entirely sure because they went to the legislature this year asking in a legislation for clarity on this one issue, 

saying, ‘‘We want the State legislature to authorize us to look at 

out of State information.’’ That legislation was introduced by the 

OIR to say—because they aren’t sure. We aren’t sure, that’s why 

we asked the court. 

Senator MARTINEZ. Have you taken a position on that legislation? 

Mr. FREEDMAN. We have not taken a public position on that legislation. We have legislation in, as well, that would clarify the law 

that the State of Florida’s regulation covers Florida policy owners, 

such as we’ve already provided to the OIR. 

Senator MARTINEZ. Let me just say, in the State of Florida, we 

have a very large senior population, as everyone knows. In that 

population, over the years, Florida has been vulnerable to land 

schemes, to sub-prime lending, where we are leading the world in 

more troubled real estate—maybe competing for California for the 

lead. There’s a lot about this that would have, on the surface, the 

appearance of some of these things, which have really required vigilance, legislation, and we’ve come a long ways in the State of Florida. I, as a Florida Senator, have to tell you that I am going to be 

very interested in going forward and how we can make sure the 

Florida citizens are well protected by this, as well as citizens across 

our State, I mean across our nation. 

98 

Let me just ask one last question, Mr. Chairman, if you would 

allow me. 

The CHAIRMAN. Sure. 

Senator MARTINEZ. The business of securitizing, as I was hearing 

the commentary from the prior panel about the securitizing of this 

business arrangement. It had an awfully, awfully similar sound 

and smell to the securitizing of sub-prime lending. 

Sub-prime lending got us in a world of trouble. It all sounded 

great. I remember Fannie and Freddie telling me, ‘‘We are bulletproof, there is no chance that we’re going to ever be in trouble, because we are doing everything by the book, everything is great, 

ever-growing housing market,’’ et cetera, et cetera. 

Can any of you address the issue of securitizing and whether, in 

fact—I mean, I’m concerned about brokers—it’s the same thing, 

you see. There were brokers with very little disclosure with no 

clear path as to who they were really working for. Were they working for the seller, the buyer, the borrower, or none of the above, 

themselves, where they were getting a fee? We’re talking about 

middle people that were not clear to anyone in the transactions, of 

which there was no transparency, banks that were making the 

loans, brokers that were securing them, passing them off to someone else who would then securitize them, bundle them, sell them 

into a marketplace that included the world. No one was asking the 

questions, but at every step of the transaction, everyone was getting a very healthy bite. 

So, everything was good, life was good until it wasn’t. A result 

of that, we have had TARP, we have got the rescue of Fannie and 

Freddie at great cost to the Federal Government. I’m not suggesting that this is the same thing, it just smells and sounds an 

awful lot like it. I would like for each of you to address that issue. 

Mr. AVERY. Thank you, Senator Martinez, I’ll go first if I may. 

You’re right to point out the analogy that there are some common ingredients. First off, the one common ingredient is that most 

of the intermediaries are paid up front to do the transactions, so 

the essence is on get the transaction done. If you understand at the 

end of the day the investor is expecting to get above market return, 

the only way you can get above market return is someone has to 

give up value. So in these transactions, for there to be a winner, 

there must be a loser. 

The question is, is it the senior citizens who’s giving up value in 

their policy or is it the insurance company who is being misled 

with misinformation on the issue of the policy or being arbitrage. 

So the question long-term will be, who is it that’s giving up value 

and how serious will that be. 

To your point, it is very possible that at the end of the day that 

the investors who are buying up these life insurance contracts once 

they’re pooled, and some of these investments are in fact held in 

qualified pension plans, which seniors are depending on for their 

retirement value, could wind up, that if the lives insured live 

longer than were expected by whoever’s evaluating these policies to 

determine value, that these investments will not be worth what 

they think they are and that the investors are going to have to continue to pay the premium required on the life insurance to wait for 

99 

the ultimate death benefit, or decide that it’s a bad investment and 

have it go under. 

So, some of your analogy absolutely applies, and it applies to 

both the investor, the insurance company, and at times, the senior 

citizen. 

Thank you. 

Senator MARTINEZ. Mr. Peden? 

Mr. PEDEN. I’m afraid I’m going to have to disagree with Mr. 

Avery’s characterization, primarily because, as he should know, 

when a policy is issued, it has inherent value. It’s a $5 million policy because it says on the front of it, it’s a $5 million policy. That 

is completely different than in the sub-prime characteristic where 

it was a market-related type of deal because of the—the value of 

houses and that sort of thing. 

Senator MARTINEZ. But they had appraisals, there were appraisals on the houses. 

Mr. PEDEN. That’s true, they had appraisals, but that’s still dependent on the appraiser. In this particular instance, you know 

that the policy itself has a future value of $5 million, it has inherent value. 

Senator MARTINEZ. I’ll agree with that. 

Mr. PEDEN. It is asset-based instead of market-based kind of investment. We do not actually securitize policies and ship them off 

like that, however I would say that because of the nature of these 

policies, because they are secure, these are issued by some of the 

most well financed and financially solid companies in the United 

States and in the world, that it is a much better type of investment 

and would actually be able to shore up some other kinds of asset 

or funds that are not doing so well. I would much prefer to own 

this kind of asset because it is asset-based rather than investmentbased. 

Now, in the case you’re referring to, with regard to securitization 

and that sort of thing, obviously there are areas, of course, securities laws when it referred to that and still apply to that, and I appreciate the opportunity to draw a distinction, which Mr. Joseph 

neglected to mention, with regard to the settlement of the issue of 

Life Partners in our State. 

Mr. Joseph, apparently, and the State of Colorado did not like 

the United States Court of Appeals decision, holding that our 

transaction was not a security, and so they changed the law, going 

against what Federal law was. One of the things he was—his commission did acknowledge though, was that no investor has alleged 

or asserted any impropriety against defendants with respect to 

their investments. 

I wanted to make sure that the Committee was aware of that, 

that there was no allegations of fraud in that regard, just simply 

a law school question as to the design of the transaction. 

Getting back to what we’re talking about here, with the 

securitization, I think that it’s important—many of the States law 

now, with regard to brokers, it’s very apparent and it’s very clear 

who the broker is representing. I’m very proud that I actually 

drafted much of the legislation that was picked up by a lot of the 

States that says, ‘‘There is a fiduciary duty by the broker,’’ irrespective of how he’s paid, whether it’s by fee or taken out of the 

100 

proceeds or however it is, he has a duty as one master, and that 

is the person who is selling the policy. 

We, on the other hand— 

Senator MARTINEZ. I would submit to you that his master is who 

pays him— 

Mr. PEDEN. Well— 

Senator MARTINEZ [continuing]. At the end of the day. 

Mr. PEDEN. Well, the thing I think is important is, the law imposes that fiduciary duty on him, whether—whether it comes out 

of the—out of the deal— 

Senator MARTINEZ. But if it’s contrary to financial incentives, I 

think that’s always problematic. 

Mr. PEDEN. Well, I would certainly agree and I think that being 

able to put that into codified legislation is important. Because you 

are right, it is important to see who the broker is representing. The 

broker should be representing one party, the person selling the policy. 

On the other side of the transaction, are provider companies like 

Mr. Freedman’s and mine, and we are on the buy side of that. 

We’re friendly, we get along with the brokers, but at the end of the 

day, we represent different parties and so there is a fair transaction in that regard. 

Senator MARTINEZ. That makes sense, that makes sense. 

Mr. Freedman, just to conclude. 

Mr. FREEDMAN. Yes, Senator Martinez, you probably have heard 

enough on that issue. I simply would address one aspect of it. You 

alluded to the, with respect to securitization, these policies are 

moved along in— 

Senator MARTINEZ. Right. 

Mr. FREEDMAN [continuing]. In the transactions, in the secondary, tertiary markets. 

One the things that was stated earlier, but needs correction, is 

that when a policy holder sells their policy, one of the standard disclosures that’s provided and one of the requirements in those, and 

that we support, is that policy owners and the insureds in those 

policies know who owns those policies, even beyond the initial sale 

of the policy by that person, that the insured be notified within a 

short period of time of any subsequent ownership of the policy. 

They’re told of that at the—before they enter the contract. If they 

don’t want the policy sold, again, they can say, ‘‘We just don’t want 

to do this transaction.’’ They’re aware of that, that’s an affirmative 

position that they take, it’s a disclosure that they are provided. 

That also carries with that policy protections, which we’ve maintained are very important, that their information be protected 

throughout the stream of commerce. 

Senator MARTINEZ. That’s a good point for you to make. 

Mr. PEDEN. Mr. Martinez, our contracts say the same thing, as 

well. 

Senator MARTINEZ. Thank you all very much. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Martinez. 

We have Senator Udall with us today. Thank you for being here, 

Senator Udall. 

101 

Senator UDALL. Thank you, Mr. Chairman. This is an important 

set of topics. I want to thank you for holding this hearing, and in 

particular for your focus on shielding consumers and investors from 

fraud, abuse, and deception. We’ve learned quite a great deal here 

today about the potential for that in these instruments. 

Senator Martinez, thank you for your questions and I want to associate myself with your remarks in pushing for transparency. I 

think you have particular expertise and insight given, as you point 

out, your State and its history and its population. 

I want to also thank Commissioner Joseph he served on the first 

panel. We’re proud of the work he’s done in Colorado. I’d say to Mr. 

Peden, he’s not perfect, but I think Commissioner Joseph really has 

operated in his professional life with the interest of consumers up 

front and center. I know there are times when well meaning and 

well intentioned people and organizations have a difference of opinion. 

If I might, I’d like to direct a question, first to Mr. Freedman. 

In your written testimony you indicated the extent that Coventry 

believes in strongly protecting consumer privacy with regard to 

those transactions. I’d like you to explain in detail, and with examples although you may want to submit some of that for the record, 

of the safeguards you’ve taken to protect the financial and medical 

information of policy owners and insureds. 

Additionally, could you share with the Committee what steps, if 

any, you’ve taken to ensure that policy holders are not being contacted by third parties to inquire about their health status. We’ve 

certainly heard those stories. 

Mr. FREEDMAN. Senator Udall, I thank you for the question. Coventry does value the privacy of individuals, both owners and insureds, of their medical information, of their financial information. 

Our company has sophisticated technology, you know, in software, 

encrypted in order to maintain that within our own systems, closed 

systems so that they aren’t able to be released. Our company also 

limits the disclosure of private information to future investors, investors in policies, limiting and retaining the ability to prohibit the 

use of that information or the release of that information to individual investors, so that only sophisticated investors such as some 

of the investors in the market, banks, insurance companies, people 

that know how to handle and are used to handling sensitive personal, medical, and financial information are doing so. 

We also support the regulations that are being adopted around 

the country that require the maintenance of privacy—of that type 

of information, medical and personal information, both from our 

transaction throughout the life of the policy. 

We also support and maintain that the limitations on contacts, 

that are found in most State laws, that are limited to contacts with 

either the insured or the insured’s representative, which is usually 

the case, a designated representative to check on the health status, 

to maintain that—that contact, limited to—not frequent contacts, 

but relatively infrequent contacts. 

Senator UDALL. I’d like to follow up after the hearing with some 

additional questions and ask you to generate some examples. I 

know there have been cases where third parties have called, trying 

to get a sense of when a life insurance policy might pay off and I 

102 

think we all, at least I certainly do, view that situation with some 

horror and distaste. So, if we could follow up with you, I’d like to 

do so. 

Mr. FREEDMAN. Yes, Senator. 

Senator UDALL. If I might, in reading Mr. Avery’s testimony, Mr. 

Freedman’s testimony, you both have a strong aversion, it appears 

to STOLIS. Is there anybody who supports STOLIs and is there 

any time at which that would be an appropriate insurance instrument? 

Mr. AVERY. I think, Senator, when people are asked the question 

you just posed, whether they support STOLI, I think everyone 

today says uniformly that they do not. That was not true in the 

early days of STOLI. However, defining what is STOLI and having 

a bright line is very difficult and that’s why we’re pushing for regulation that clarifies that. 

For example, there are instances where a consumer will buy a 

policy, and as long as there’s no written agreement, even if they 

were to sell the policy six months later, when they had the intention to sell it. We would argue that’s STOLI, others would argue, 

no, that’s their property right to do so. We think whenever there’s 

an inducement to purchase a life insurance contract with the 

thought that it will be sold, generally after the contestability period 

nowadays, that that is STOLI. So it’s around the definition of what 

is STOLI. It’s what is. 

Senator UDALL. Mr. Peden. 

Mr. PEDEN. Thank you, Senator. The problem that Mr. Avery 

brings up is that you can not adequately or prove, in an empirical 

fashion, what the intent of someone was. If I buy my house today 

for, say $100,000 and tomorrow somebody offers me $200,000 for 

it, that sounds like a good deal. I didn’t have the intent to sit on 

it or I may have to live in the house 15 years before it appreciates 

that much. So it’s difficult to say what the intent of the individual 

was. 

There is no question, however, in the law, that if there is a contemporaneous to sell the policy at the time the policy is taken out, 

that is STOLI and that is something that I don’t think anyone here 

supports. So we would join that as well, of course. 

Senator UDALL. Mr. Freedman. 

Mr. FREEDMAN. Senator Udall, thank you. As everyone has said, 

STOLI is bad. As I’ve testified earlier, it harms the consumers and 

it harms the insurance companies, it harms our business as well, 

the secondary market. 

As Mr. Peden said, it—first, as Mr. Avery said, there needs to 

be a bright line and that bright line is clearly established, that the 

person who is taking out the policy has to have an insurable interest. That bright line is established that there not be fraud in the 

application or the issuance of the policy. It was also stated, that 

there not be an inducement. Those are clear, bright line standards. 

Where the schemes have come up, the National Conference of Insurance Legislators have said, ‘‘We’re going to find those schemes, 

we’re going to define those schemes and we’re going to attack those 

schemes.’’ That’s the way to do it, and we think that’s been successful as States are adopting that model. 

103 

Senator UDALL. I know you’ve all suggested there is some difficulty in defining a STOLI versus an insurance instrument. We all 

agree a clear definition is necessary and appropriate. 

Knowing the Chairman as I do and knowing the ranking member 

as I do, they’re going to continue to work to find that definition, 

because when this is subject to abuse, it’s just not acceptable, it’s 

flat out not acceptable. So, we’ll continue, I know, to work with you 

and also insurance commissioners and other experts draw that 

bright line in a clear way. 

Mr. Peden, if I might, I’d like to come back to the interchange 

you had with Senator Martinez when you talked about the difference between asset-based and investment-based securities. You 

said that when $5 million is on a life insurance policy, that’s 

backed up and that $5 million will be forthcoming. 

I’m still curious, and I think the Senator was—was on an important line of questioning, and I think what he was trying to get at 

is where is that $5 million held, where is that $5 million payout 

going to come from. Because you still are using leverage, insurance 

companies still utilize that approach, after all, the money is going 

to be invested elsewhere to generate a return. I think, Senator 

Martinez, you were on to something, to ensure that the face value 

is actually going to be paid out. Could you comment, perhaps the 

rest of the panel would like to as well. 

Mr. PEDEN. Certain and thank you very much for the question. 

Senator Udall, I think that—it’s important to recognize that—I beg 

your pardon—it’s important to recognize that the—the solvency 

and the solidity of the insurance companies whose policies are purchased in a life settlement is extremely important. We rely not only 

on the applications, which individuals complete with regard to 

their financial capacity and other representations they make in 

that, but also with regard to the oversight which the various States 

issue on these policies—these companies. 

We want to make sure that they maintain their high ratings be- cause—you asked where the $5 million comes from. It comes from 

Prudential or Northwestern Mutual or any of the other insurance 

companies that are out there. These are all extremely large insurance companies. They have to be because only a large insurance 

company can issue a large-face policy. 

Now I can’t speak to other companies because we only buy policies from sophisticated individuals who, as I said, the faces are 

usually $1 to $10 million. So, the quality of the insurance company 

is quite, quite good. What we want to see is a very healthy and remaining healthy insurance industry, but one which does recognize 

and does not impede the rights of individuals to see their policies 

when those policies become obsolete. Those are the kinds of situations that we’re talking about and that is the niche which life settlements fills. 

Senator UDALL. Mr. Avery or Mr. Freedman, you don’t have to 

comment, but if you’d care to. 

Mr. AVERY. I’d be glad to, Senator. We certainly agree with Mr. 

Peden that the large life insurance companies are sound, on a solvent basis, and we appreciate the fact that he wishes we’d remain 

sound, but you go back to my issue about that if the investor is 

going to get an above market return, it’s coming from somewhere 

104 

and someone. If a certain industry undertakes certain actions that 

cause that to happen, then does question long-term run the solvency of that. 

So, in my own case at Prudential, one of the reasons we want 

to be sure we’re not participating in the STOLI transactions, which 

we think are arbitraging the pricing of policies, we want to make 

sure that we’re not writing those policies because we intend to remain solvent a long time. 

Senator UDALL. Mr. Freedman. 

Mr. FREEDMAN. Senator Udall, really just taking from the two 

other gentleman, that there is a value and that value is being paid 

to consumers. The value may be being paid by carriers as a result 

of a secondary market transaction to a life settlement company or 

to an investor, but the value that the policy holder receives is 

what’s really at stake. Are they taking a cash surrender value, are 

they taking a market value, and are they getting that value 

through the types of transparent transactions that we support? 

I really would just close with, my—at least my response with, I 

want to refer to the 1886 Wisconsin Supreme Court decision that 

said that—the court said that they were not able to perceive why 

the holder of a valid policy should be prevented from realizing the 

value of the same to him, before his death, by a bona fide sale or 

assignment thereof. Such a sale or assignment may be, in fact, absolutely necessary in order to get any benefit of his policy. That’s 

what’s protected in their ability to sell that, for them to get that 

value. 

So, the attack—the issue of getting that value is in the hands of 

the consumer, a competitive market gives them value, carriers may 

choose to give consumers that value or they’ll wind up giving it to 

the secondary market. 

Senator UDALL. Thank you, all three of you, for those explanations. I—in reading the testimony, it is fascinating, the case law 

around insurance products. It’s tens of years, decades and longer, 

and we, of course, have a responsibility to pay attention to the case 

law, but as these products evolve we also have a responsibility to 

consider what might be happening. 

We know in Washington all to well, that credit default swaps are 

a form of an insurance product, a very fancy and convoluted and 

complex insurance product, and they are part and parcel of the reason that we’ve had some very tough votes and very tough decisions 

over these last number of months. 

So, thank you, Mr. Chairman. Thank you, Ranking Member. 

The CHAIRMAN. Thank you very much, Senator Udall. 

Any other comments from the panel or Senator Martinez? 

You’ve rendered a real public service in being here today. The life 

settlements industry needs our attention and it will get it. Thank 

you so much. 

[Whereupon, at 3:40 p.m., the hearing was adjourned.] 

(105) 

1 NAIC Model §8 and NCOIL Model §9. 2See People of the State of New York v. Coventry (New York Supreme Court No. 404620/06, 

filed October 2006; Denial of motion to dismiss and reinstatement of action for common-law 

Continued 

A P P E N D I X 

FLORIDA OFFICE OF INSURANCE REGULATION RESPONSE TO SENATOR SPECTER’S

QUESTION

Question. I have read a copy of the attached letter, dated May 8, 2009, from Michael Freedman, Senior Vice President, Coventry, to Senate Special Committee on 

Aging Chairman Kohl and Ranking Member Senator Martinez regarding the testimony of Mary Beth Senkewicz, Deputy Insurance Commissioner, Florida Office of 

Insurance Regulation, to the Special Committee on April 29, 2009. Ms. Senkewicz 

testified to the Committee that ‘‘Coventry refused to file an Annual Report for the 

period ending December 31, 2008, as required by Section 626.9913(2), Florida Statutes.’’ But the letter she signed on March 10, 2009 states that Coventry’s filing ‘‘fulfills Coventry’s obligations under Section 626.9913(2), Florida Statutes for calendar 

year 2008.’’ 

I am interested to learn how you can reconcile the apparent conflict between Ms. 

Senkewicz’s testimony to the Committee and her statement in the letter she sent 

to Coventry on March 10, 2009? 

Answer. Please refer to our response to the letter submitted to Chairman Kohl 

and Ranking Member Martinez by Michael Freedman on May 8, 2009. 

ACLI RESPONSE TO SENATOR SPECTER’S QUESTION

Question. I have received a copy of the April 15, 2009 letter from the Life Insurance Settlement Association to Senator Kohl (attached) in which, among other 

things, the Association states that ‘[u]fortunately, rather than compete against life 

settlements, insurers have engaged in a concerted effort to impair and inhibit the 

ability of American seniors to access the value of their life insurance assets. In this 

effort, insurers have sought to interfere with consumer rights under the contract of 

insurance, limit information and, egregiously, provided false and misleading information that has led many seniors to drop their policies without the benefit of knowing about the true market value of their policies.’’ The letter contains both general 

and specific allegations, including that insurance companies have; 

•fired agents for counseling clients about the secondary market; 

•made false statements about life settlements and life settlement companies; 

•provided misinformation to policy owners; 

•pressured competing insurers to boycott premium finance loans; 

•sought to rescind policies sold in the secondary market; 

•imposed contractual restrictions on policy sales; and 

•refused to issue policies when a prospective insured indicates having discussed 

life settlements with his or her agent.’’ 

What are your recommendations on how to protect consumers’ in life settlement 

transactions against efforts that would impair consumers’ access to information or 

assistance about life settlements? 

Answer. In addition to the many excellent recommendation offered during the 

Committee’s hearing of April 29, the ACLI recommends that the states faithfully 

enact the provisions of the NAIC Viatical Settlements Model Act or the NCOIL Life 

Settlements Model Act that require settlement disclosures to policy owners.1 These 

disclosures were adopted by the expert insurance regulators and expert state legislators, respectively, after New York and Florida authorities found pervasive fraud 

in the business practices of settlement brokers and providers.2 The nature of the 

106 

fraud Ordered by Supreme Court Appellate Division at 2008 N.Y. Slip Op. 05548 (June 17, 

2008)). The New York findings were corroborated by similar findings by insurance officials in 

Florida Office of Insurance Regulation v. Coventry (Order Show Cause No. 88270-06, resolved 

October 2007) (Order requires Coventry pay Florida $1.5m plus submit to special compliance 

audits until 2009 as well as specially report all Florida resident transactions quarterly and 

more). 3The NAIC Model has additional protections for consumers who are purchasers of settled policies. See NAIC Model §8E, F and G. 

fraud included systematic breaches of fiduciary duty, conflicts of interest, unconscionable payments to settlement middle-men often in excess of the amounts paid 

to the consumer for his insurance policy, and questionable use of the consumer’s 

personal information. Faithful adoption of the consumer protection provisions of the 

model laws will protect consumers’ access to information with respect to life settlements, such as: 

•There are alternatives to settlements including accelerated death benefits or policy loans offered under the insurance contract; 

•A settlement broker represents the consumer exclusively and owes a fiduciary 

duty to the consumer; 

•Some or all of the proceeds of the settlement may be taxable and tax assistance 

should be sought; 

•Proceeds from a settlement could be subject to the claims of the consumer’s creditors; 

•Receipt of settlement proceeds could affect the consumer’s eligibility for Medicaid 

or other government benefit or entitlements, and advice should be sought from government authorities; 

•The consumer has a right to rescind a settlement contract; 

•Funds will be sent to the consumer within three days of transfer of the insurance 

policy or its benefits to an investor; 

•A settlement may forfeit or affect other rights or benefits of the insurance policy, 

such as conversion rights; 

•Medical, financial or personal information about the consumer obtained by settlement providers or brokers—including personal identity information—may be disclosed to investors as necessary and often; 

•The consumer may be contacted as often as once a month following settlement 

of his insurance policy to determine the consumer’s health status and confirm his 

address and telephone number; 

•Whether there is any affiliation between the settlement provider and the issuer 

of the insurance policy; 

•The contact information of the settlement provider; 

•Whether there is any affiliation between the settlement provider and investor 

purchasing the consumer’s policy; 

•The possible loss to the consumer of coverage on other lives if the policy is a joint 

policy or has family riders to the policy; 

•The dollar amount of the death benefit, guaranteed insurance benefits, accidental 

death and dismemberment benefits that might be lost to the consumer by the transfer of the policy; 

•Where and with whom the consumer’s funds will be escrowed pending completion 

of the settlement transaction; 

•The contact information of the settlement broker; 

•All offers and counter-offers made for the consumer’s insurance policy; 

•Whether there is any affiliation between the settlement broker and any person 

making an offer to buy the consumer’s policy; 

•The amount and method of calculating the compensation paid to the broker from 

the value received for the consumer’s policy; 

•The total amount of the settlement broker’s compensation; and 

•The change in ownership of the consumer’s policy if the settlement provider 

transfers it to another stranger or changes the policy beneficiary.3

Enactment of these disclosures will substantially protect consumer’s access to information or assistance about life settlements in the settlement transaction. 

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EXHIBIT G 

See Page 121 through 139 for Exhibit G 

State of Florida Division of Administrative Hearings 

Life Insurance Settlement Association, Petitioner vs. Financial 

Service Commission and Office of Insurance Regulation, Respondents 

Case No. 09–0386RP 

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Æ 


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