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The Securities and Exchange Commission (SEC) is investigating Life Partners Holdings Inc., a Texas based company, for arranging several billions worth of viatical settlements sales. The SEC's main concern is how Life Partners calculated its mortality estimates, which is what investors use to value a viatical settlement investment. This comes as no surprise since 90% of the insured individuals, many of whom were HIV positive, outlived company estimates.

A viatical settlement is the sale of an owner's life insurance policy to a third party for more than the cash surrender value, but less than its net death benefit. The seller of the policy is benefited with a lump sum payment. The buyer of the policy pays the monthly premium and receives the benefit of the policy when the seller or the insured dies. Viatical settlement transactions typically involve an insured who is terminally or chronically ill. A person who is terminally or chronically ill has a life expectancy of less than two years. From an investor's perspective, the return will depend on the seller's life expectancy and date of death. Therefore, viatical settlements cannot be equated with zero coupon bonds because the date of death or maturity is uncertain.

Shorter mortality estimates would result in an investor anticipating lower costs and a higher return on investment. In the case of Life Partners, almost all of the insured individuals lived beyond the company's estimates, which forced higher costs and lower returns upon investors. This led the SEC to investigate a Nevada physician, who was responsible for calculating mortality rates for Life Partners. After its investigation, the SEC concluded that one Dr. Cassidy used an unrealistic approach that produced short life expectancies.

Companies like Life Partners do better than the clients they purport to serve. Life Partners has sold 6,400 policies worth $2.8 billion to 27,000 clients since 1991. Also, fees to Life Partners have averaged as high as $308,000.00 per policy in some years. In return, investors were told they would earn 10 to 15% on their money, which was not the case since returns were driven down due to longer than expected mortality rates. Clearly, viatical settlements were made to benefit Life Partners' bottom line.

Brokers have a duty to make recommendations that are suitable for its clients. This duty includes informing clients of the risks associated with an investment. If brokers fail to adhere to their duties, their brokerage firms can be held liable to investors for damages even if they did not know of the brokers' conduct.

Have you suffered a loss in a viatical settlement? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website,, post a comment, call (800) 732-2889, or email Mr. Pearce at for answers to any of your questions about this blog post and/or any related matter.