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California Court Regarding Disclosure of Life Settlements

A California couple brought a class action lawsuit in January of this year against Lincoln National Insurance Company, alleging that they did not know they could sell their $7.2 million insurance policy on the secondary market. The couple alleged that they had twice had to reduce the size of the policy, leaving them with only $2 million of coverage, because they could not afford the premiums.

The couple further alleges that the Lincoln agent gave them only two options – pay higher premiums or surrender all or part of the policy.

A third option actually was available however, which is a life settlement. A life settlement is the sale of an unwanted or unneeded life insurance policy. In the case at hand, where a couple cannot afford the premiums, they could sell the policy to an investor, usually for many times more than the surrender value of the policy. As such, the life settlement can provide a “win/win” scenario, where the insured receives a payment and a reduction in premiums, and the investor receives a non-correlated asset that can produce interesting returns.

The Judge in this case said that the plaintiffs had sufficiently alleged a duty to disclose on the part of the insurance agent, who did not tell the couple about this third option. This case could be significant for the insurance industry and the life settlement industry. Life settlement market players have long alleged that insurance companies who do not permit their agents to discuss life settlements are doing their clients a disservice as they may be foregoing their very best option.

Dan Young is Vice President of Portfolio Management at Vida Capital and an adjunct professor at the University of Texas Law School. Vida Capital is a vertically integrated asset management company with more than $250 million in assets under management, and the majority of the firm’s backing is provided by Austin Ventures, a $4 billion private equity firm based in Austin, Texas. Vida specializes in the structuring, servicing, financing and management of life settlement assets, asset-backed securities, and customized portfolios. Vida is a board member of the Institutional Longevity Markets Association, the institutional trade group for the asset class founded by Credit Suisse and others.

Dan Young, CLU, ChFC


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