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'Death Bonds' Look for New Life

Subprime "Death Bonds"

Retirement Value was one of several companies in life settlement market, sometimes referred to as the "death bond" market, that when through its own financial crisis in 2008.

Retirement Value was shut down for securities fraud in 2010, according to The Texas State Securities Board. Brady explained that the longer people lived the more money people were required to invest and apparently the company was underestimating the amount of time a person would live in order to make more money.

"It has been a very nasty experience. I feel like I've been taken advantage of," Brady said. "I don't know if we will get the money back. If we do it will probably be a minimal amount because they are using it for the lawsuit attorney and lawyer fees. They took advantage of 900 people here."

The life settlement fund may have cost investors over $65 million, according to a report by The Associated Press. Unfortunately, it is not the only life settlement company being investigated for fraudulently predicting the deaths of policy holders.

Another example of retail investors getting burned by life settlements is Life Partners Holdings, which currently being investigated by regulators, according to Securities and Exchange Commission filings. The company may also face civil charges from the SEC for how the company projects life expectancy for those people whose policies they have purchased. The company CEO admitted in court that most of the life expectancy projections were probably wrong and were acquired from a Doctor in Reno, Nevada who could not verify the accuracy of his predictions, according to an article by The Wall Street Journal. Life Settlement could not be reached for comment.

"It is an extremely risky market. We have deep concerns for investors in this market. They have to be very careful," said California Insurance Commissioner Dave Jones. "We are watching what happens with Life Partners (LPHI)very carefully and depending on the outcome we will factor the regulations accordingly."

Because of high profile cases like Retirement Value and Life Partners, the traditional insurance industry is less than enthusiastic about life settlements.

James Avery Prudential's (PRU - Get Report) CEO of Individual and Life Insurance and Agency Distribution says that the calculations that life settlement companies often provide investors "cherry pick" the best policies, but in the end they don't add up. Avery adds that many people in the pools are living two, three, or four years beyond those predictions made by the companies.

"There is a growing number of fraudulent cases. This is so similar to the subprime market where investors are promised a 15 percent return and buyers are promised value, but this is a Wall Street arbitrage business where the middleman walks away with a profit," says Avery. "The life settlement industry has been lobbying and regulations are not as effective as they need to be. Consumers and investors wind up paying a price."

The industry, which used to be dominated by companies such as Goldman Sachs (GS - Get Report), Citigroup (C - Get Report), JPMorgan (JPM - Get Report) and American International Group (AIG - Get Report) has gradually become dominated by foreign banks, and U.S. individual and institutional investors including hedge funds, pension funds due to increased regulation. Credit Suisse (CS - Get Report), which owns PeachTree; Fortress (FIG); Apollo (APO); BlackRock (BLK) and Coventry and larger investors in the market.
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