BELTON, Mo. - One of life's sure bets is that someone will eventually kick the bucket. But placing a wager on when someone will die? Well, that can be a risky investment.
A 41 Action News investigation studied the life settlement industry, a niche financial option for investors looking to grow their nest eggs. The transaction allows people to invest money in other people's life insurance policies and collect the death benefits when the insured passes away.
If the person dies within the predicted life expectancy, investors can reap double-digit returns. But all too often, critics say the results can be grim.
A 41 Action News investigation focused on the business model of Life Partners, Inc, a self-described industry leader in the life settlement market. The Texas-based company, which has sold thousands of policies to people all over the nation, is facing serious accusations of misleading investors with grossly inaccurate life expectancies.
KC area investor regrets betting on death
In 2010, Roy Johnson was looking for a solid place to invest about half of his nest egg.
The retired veteran, who lives in Belton, Mo., with his wife Norma, heard about an opportunity called life settlements. His financial adviser promoted the option as a way to reap double-digit returns in a short time period.
After some deliberation, Johnson invested $200,000 with Life Partners, Inc. and received $20,000 shares in ten different life insurance policies.
The people were complete strangers to Johnson. All he knew was their last name, their age, a brief medical history, and their estimated life expectancy (either two to four years or three to five years).
When the people die, the Johnsons will receive their portion of the policies' face values, ranging from $2 million up to $10 million. According to a projection provided by their financial adviser in 2010, the payout should balloon to $354,112 -- an attractive 17 percent return on their investment, if the average life expectancy of four-and-a-half years holds true.
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"What attracted me to it is that I was supposed to get a nice return on the money, and it sounded like a safe move," Roy Johnson explained.
But there's a problem: It has been almost three years, and no one has died. Johnson is nervous he made a bad investment.
He contacted 41 Action News and asked for an investigation of the type of investment and the company, Life Partners. It turns out there was a reason for Johnson to be concerned.
Life settlements: Appealing financial alternative or morbid investment?
Life settlements may sound like a morbid investment to some, but they provide people with an opportunity to receive a lump sum payment for life insurance policies they no longer want or need, often because of expensive premiums.
Life settlements started during the AIDS epidemic, when the disease was usually fatal. However, as medical advances hurt that aspect of the business, it changed its focus to offering life settlement transactions to the elderly.
Life Partners was founded in 1991 by CEO Brian Pardo and touts itself as a pioneer in the industry. According to the company's website, Life Partners has completed 143,000 transactions in connection with the purchase of over 6,500 policies -- totaling about $3 billion in face value.
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People who are interested in selling their life insurance policies get a life expectancy from an independent actuarial firm. Life Partners then offers to buy the policy for a fraction of the face value.
On the flip side, Life Partners markets those policies to investors according to a price based on life expectancy. Investors pool their funds to cover the premiums for the estimated life expectancy period.
However, if people live beyond those life expectancies, it reduces the return on investment and also requires additional premium payments from investors to keep the policies active.
Company accused of defrauding investors with inaccurate life expectancies
Life Partners is facing a growing list of accusations from federal and state government regulators.
In January of 2012, the Securities and Exchange Commission sued the company and its senior officers for allegedly defrauding and misleading shareholders and consumers, along with profiting from insider trading.
Central to the lawsuit is the issue of life expectancies. The SEC alleges Life Partners knew its estimates were too short, but ignored that fact because it allowed the company to price the policies higher.
According to the court documents, Life Partners relied solely on the estimates of a Nevada physician, Dr. Donald Cassidy. The SEC claims Cassidy has no actuarial training, never had any life expectancy experience before he started contracting with Life Partners in 1999 and his "dismal" track record was never evaluated.
By 2009, the lawsuit said Life Partners senior officers were aware that 90 percent of people were outliving Cassidy's life expectancy estimates.
Life Partners categorically denied the allegations in its legal response, calling the complaint "riddled with misleading assertions."
A jury trial is expected later this year.
Government regulators say Life Partners sells policies for a much higher price than what it purchased them for, pocketing the lucrative fee.
They also argue the company only provides the Cassidy-produced longevity estimates to investors instead of life expectancies from other actuarial firms.
41 Action News reviewed annual reports that Life Partners is required to file with the Texas Department of Insurance, obtained with an open-records request.
In 2010, the same year the Johnsons invested their funds, Life Partners sold 175 policies to investors with an average life expectancy of 4.5 years.
That year, 77 policies Life Partners sold in previous years "matured," meaning the people died. Of those policies, 83 percent of the insured had lived beyond the Life Partners longevity estimate.
On average, the insureds lived almost seven years longer than the company's life expectancy prediction.
Like a used car salesman rolling back an odometer
The SEC is not the only government agency pursuing legal action against Life Partners.
Last August, a lawsuit filed by the Texas Attorney General mirrored many of the allegations from the SEC complaint, including the details about inaccurate life expectancies.
"The revenue scheme is analogous to a used car salesman purchasing a high-mileage car, 'rolling back' the odometer, then overcharging the subsequent purchaser and pocketing the difference," the lawsuit stated.
However, the status of that lawsuit is uncertain. Last September, a Texas judge ruled that life settlements aren't securities covered by state law.
Aside from an appeal, the judge's decision effectively delivered a death blow to the Texas Attorney General's lawsuit.
Back in 2007, the Colorado Securities Commission also sued Life Partners for selling unregistered securities and not disclosing the rate at which the insured were outliving their life expectancies.
That case was settled for $12.8 million and gave Colorado investors the option of being refunded the purchase price of their policies.
A growing number of law firms are also soliciting horror stories from consumers who purchased Life Partners policies to see if they can pursue individual or class action claims.
"I actually have a client who invested $1 million in 51 different policies, and not one of them has matured yet," said Jim Orr, an attorney at the Dallas-based law firm Heygood, Orr & Pearson.
Do financial advisers recommend life settlements?
Garry Bussing is the director of retirement plans at the Mutual Fund Store in Overland Park. As a longtime financial adviser, he can see one aspect of the attractiveness of life settlements -- their performance does not follow the ups and downs of the stock market.
Regardless of how the Dow Jones performs, people will die.
However, the promoted double-digit returns make Bussing uneasy. A higher rate of return usually means a higher level of risk, which he does not recommend for older clients.
Not to mention the ghoulish aspect: The sooner that someone dies, the better for the investor.
"You're actually betting on someone's mortality, and there are some questions I have about the appropriateness of that arrangement," Bussing said. "Folks that own these policies have no interest in the people living. Their interest is in them dying and in general, that's not a good thing."
According to the North American Securities Administrators Association, life settlements make the top-10 list of "investor traps."
Rodger Sprouse, founder of Sprouse Financial Group in Overland Park, is the financial adviser who recommended the life settlement investment to Johnson.
Sprouse declined to speak with 41 Action News for the story. His company website does not specifically mention Life Partners, but does describe a strategy for older investors.
"To secure your future, you don't have to accept pitiful returns!" the site says. "There are some very unique alternatives available. You may continue to grow your nest egg at attractive rates of return without the risks of the stock market."
A Wall Street Journal article said commissions to sales agents, called licensees, are about 12 percent of the amount investors put in.
Is Life Partners changing its life expectancy methods?
The surge of legal action and negative publicity has taken an undeniable toll on Life Partners' viability as a company.
In fiscal year 2012, Life Partners reported a $5.7 million loss. The previous year, it had posted a $35.1 million profit.
In the company's latest annual report, Pardo told shareholders that Life Partners had added 21st Services, LLC to provide a second life expectancy estimate. According to Pardo, the longer of the two estimates will be used to calculate the amount of premium payments investors will need to cover.
The company admitted that it needs to regain trust from consumers to survive.
"Despite attacks on our integrity from the financial press, regulators and opportunistic plaintiff law firms, we have and continue to remain committed to delivering value to our clients and shareholders," Pardo wrote in the June 2012 letter to shareholders.
Tracking down woman who sold her life insurance policy
The identities associated with the life insurance policies are supposed to remain anonymous. However, 41 Action News tracked down one of the insured living in Texas.
According to paperwork provided to Johnson, the Houston woman had a life expectancy of three to five years when he invested in her $5 million policy in 2010.
Over the phone, the woman's son (who assisted her with selling the policy to Life Partners) said his mother is still showing all the signs of being a healthy 87-year-old. He recalled her life expectancy being at least twice as long as the one quoted by Life Partners to investors like Johnson.
For the Belton retiree, there seems to be mounting evidence that his investment prospects could turn grim. There is certainly a chance the policies could still produce a healthy return, but the 81-year-old isn't holding his breath.
"I feel like I was deceived," Johnson said. "I could be gone before any of them for that matter."
Instead of getting a payout in the mail, the Johnsons are beginning to wonder if they will start receiving premium bills to keep policies alive.