Opulen Capital Life Settlement: No Contest: Is the life settlements market fit for contestable life insurance policies?

Probably one of the bigger concerns for brokers and investors in the life settlements market, beyond the value and statistics associated with the life settlements policy pool, is a small clause that is included in quite a few life insurance policies. That clause can be the difference between a sound return on investment or a complete loss. It’s the contestability clause.

Under the contestability clause, the insurer underwriting the policy has a window of opportunity in which to argue any validity claims on that policy within a set time period, usually two years. The state of California has made mandatory the inclusion of contestability clauses – also known as non-contestability clauses – to allow insurers just two years from the policy issuance date to investigate and contest any aspect of the validity of coverage. Beyond that two year time frame, insurers have little recourse, no matter what the reason.

What does that mean for life settlements agreements? It could mean quite a bit if the policy holder dies within that two-year window. Suppose Joan, who has owned her $4 million life insurance policy, with a $1 million surrender value, for 13 months, uses the life settlement market to sell her policy. Joan is paid $2.3 million for her policy. Within just a few weeks of the sale, Joan passes away unexpectedly. Under any other policy without the contestability clause, the investors in the life settlements arrangement who purchased Joan’s policy would collect the death benefit.

However, Joan’s insurer, learning of the life settlement agreement Joan entered into, decides to investigate the validity of Joan’s policy. The insurer is able to establish probability that Joan purchased the policy with the express intent of reselling it to the life settlement investment community. A court rules in favor of the insurer, which means the investors, having invested a cumulative $2.3 million in the policy, lose their investment and the death benefit.

Even if Joan had survived and the insurer had investigated her policy’s validity, there’s a good chance her policy would have been rescinded. Insurers can, within that two-year period, deem the policy was obtained and some form of fraud did occur. Specifically, the insurer could rule that Joan did not purchase the policy with the intent of benefiting a legitimate beneficiary but instead has been transferred to someone outside of Joan’s family or charitable interests, which means her policy doesn’t pass the “good insurable interest” test.

How can investors and sellers navigate around policies with contestability clauses? By understanding the risks, making sure the deals surrounding such policies adhere strictly to all applicable laws, and by diversifying the portfolio to include more policies without contestability clauses.

For more information on contestability clauses and what that means to your portfolio, contact Opulen Capital. Email us or call 877-Opulen 1 or visit our website at http://www.OpulenCapital.com.