Considering Life Settlement? Do Your Homework First

April 07—APTOS — A Los Angeles company that has sold life settlement investments to institutional investors will make a pitch to individual investors in Aptos this week.

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Pacific West Capital Group, headed by Andrew Calhoun Jr. , will offer free seminars today and Friday at Bittersweet Bistro. Those interested must call 1-800-588-8000 for details.

“It enables people to diversify their portfolio,” Calhoun said in a phone interview, cautioning, “It’s not suitable for startup investors.”

Potential clients must have a net worth of at least $250,000 not counting the value of their home, and they can’t invest more than 10 percent of their net worth, he said.

Institutional investors have included pension funds, Deutsche Bank, Credit Suisse, and Goldman Sachs, though Goldman Sachs decided to get out of life settlements last year.

Life settlements were invented in the 1980s, when policyholders with AIDS had depleted their assets and sought to sell their life insurance policies to pay for treatment. Investors bought the policies, then collected upon the death of the insured. A decade later, the market dried up because of new drugs prolonging the lives of AIDS patients.

Life settlement companies then turned to a different market, people 65 and older who would rather have cash now than leave it to their heirs later.

“We only buy policies from those 75 and over,” Calhoun said. “If the insured lives a long time, it creates a problem for investors.”

While it’s impossible to predict exactly when someone will die, he noted life expectancy is 74.9 years for men and 80.1 years for women.

The market for life settlements grew to be a $12.9 billion industry in 2008 before the recession hit, according to a 2010 report to Congress by the Government Accountability Office.

More than 3,700 life insurance policies were purchased in 2007, compared to 4,500 in 2008 and 2,600 in 2009, according to the GAO survey.

What can you get for a policy? It depends on your age, your health and your premiums.

“Typically it’s 15 to 30 cents on the dollar,” said Calhoun. “We give two to 10 times the surrender value.”

Pacific West Capital Group then sells shares, largely to institutional investors such as banks or pension funds, at a price higher than what is paid to the policyholder.

“We make money through a gross margin,” Calhoun said.

After seven years in California, the company has “a couple thousand investors and not one complaint registered with the Better Business Bureau,” Calhoun said.

A complaint prompted the state to issue a cease-and-desist order to Pacific West Capital Group on Dec. 11, 2007, but it was withdrawn a month later. Calhoun attributed the complaint to a disgruntled former employee.

“The reason’ for the withdrawal is confidential, but orders such as this one are subject to a due process’ whereby the accused may challenge the order and present information to contradict or justify actions or practices,” Department of Corporations spokesman Mark Leyes said.

California legislators passed a law in 2009 requiring policyholders applying for a life settlement be given information in 12-point type to read and sign. The list includes: The insurer may offer the option of accelerating benefits; the life settlement sale may be taxable; they should seek the advice of a professional financial adviser; and they have 30 days from when they sign or 15 days from when they receive the proceeds to rescind the contract.

Robin Gysin of the Santa Cruz District Attorney’s Consumer Affairs Office suggested consumers look at all the potential costs of investing in life settlements.

“If you are going to sell current investments to buy these, what are the costs of redemption?” she pointed out.

One of the hardest things to know when you are selling a life insurance policy is whether you are getting a fair price, according to the Financial Industry Regulatory Authority, the trade organization for the securities industry, suggesting consumers “shop around.”

The 2010 GAO report recommended Congress consider taking steps to protect life insurance policy owners rather than leaving it to state regulators.

Congress has not done that, but the U.S. Securities and Exchange Commission has posted an alert on its website for individual investors about life settlements. That agency has brought several successful actions over the past decade alleging fraud in connection with life settlement securities.

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