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Will the Texas Supreme Court Rule That Life Settlement Policies Are Investment Contracts?

Samuels Yoelin Kantor LLP

On December 12, 2014, NASAA presented an amicus brief supporting the Respondents in the Texas Supreme Court case Arnold v. Life Partners, Inc. The brief argued that that life insurance contracts sold as life settlement contracts to third parties as investments during an insured’s lifetime should be classified as investment contracts under Texas law, and thus be subjected to regulations under the Texas Securities Act.

In 2013, the Dallas Court of Appeals held that life insurance contracts were investment contracts under Texas law. Life Partners appealed the decision to the Texas Supreme Court.

In the Supreme Court, Life Partners heavily relies on the Supreme Court’s decision SEC v. W.J. Howey. In Howey, the Court held that one requirement for an “investment contract” is that profits must be derived from the significant efforts of others. A life insurance insurance contract, according to Life Partners, does not meet this criteria because the promoter does not “take specific efforts after the sale of an investment to enhance the investment value.”

NASAA argued in its amicus brief that Life Partners’ interpretation of Howey is overly rigid. The reality is that investors rely on Petitioners’ expertise in selecting, evaluating, and pricing life insurance policies. Further, investors rely on the Petitioners’ services in making on-going premium payments and collecting the insurance benefits after a policyholder’s death. Thus, life insurance contracts meet the criteria for an investment contract stated in Howey.

NASAA also correctly pointed out “over the last fifteen years, there have been widespread problems in the sale of Life Settlement Contracts, and as a result, thousands of investors have lost significant amounts of money.” If Texas intends to prevent these problems in the future, it would be a mistake to exclude life insurance policies from regulations – including registration and disclosure requirements – under the Texas Securities Act.

Robert Banks, a nationally recognized securities attorney, has represented clients in lawsuits involving the sale of life settlement contracts and viatical settlements around the nation for many years. Our firm has seen fraud in these transaction, including opinions from persons masquerading as physicians representing to investors that an insured has a short life expectancy, when in fact they are middle-aged and have no life-threatening illnesses. Investors should know that the commissions earned by brokers in these transactions can be astronomical.In one of our pending cases, the brokers earned more than $225,000 on the sale of a life insurance policy that paid the insured selling the policy only $780,000.

Please contact our office immediately with any questions or concerns you might have regarding your investments. One of the biggest problems people have when trying to recover a loss is that they waited to long to get help.

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