Lawsuit: Insured People Aren't Dying on Schedule

Consumers who invested in “life settlement” policies have filed afederal RICO class actionagainstLife Partners,charging that itreaped "millions in illicit profits" in the secondary market in life settlements, through its "nefarious organization composed of life settlement brokers, agents, and a single corrupt doctor to fraudulently provide life settlement purchasers with grossly understated life expectancy estimates.

Boiled down to the essentials, the investors are angry that the people whose insurance they are paying for have not died on schedule.

The suit, filed in U.S. District Court in Los Angeles,alleges that Life Partners bilked investors by selling overvalued life settlements and viatical settlements.

Life settlements are life insurance policies on someone else's life. Investors buy the policies and reap the benefits when the insured person dies. Obviously, the most valuable policies are those that insure the life of someone who is not likely to live much longer, since investors don't want to wait decades to collect.

Thus, the most important factor in establishing the value of a life settlement is the life expectancy of the insured person. The lawsuit claims that Life Partners used their brokers, agents and doctor to sell settlements that “grossly understated” the life expectancy of the insured persons.

The scheme enabled the defendants to “reap millions in illicit profits by selling life settlements for more than they were actually worth had true and correct life expectancy estimates been used,” the suit charges.

A life settlement is normally defined as thesale of an existing life insurance policy by a terminally ill or elderly person with a life expectancy greater than two years. A “viatical” settlement is the sale of a life insurance policy by a person with a life expectancy of less than two years.

The name plaintiffs in the action include William and Mary Rice, who paid $200,000 to invest in five life settlements for which Life Partners' doctor, David Cassidy, M.D., had provided life expectancy estimates.

The Illinois couple made their investment in the summer of 2007. Since then, they have been required to pay ongoing premiums on the insured persons, who have not yet died, thus depriving the Rices of their expected gains, the suit charges.

If the Rices had known the people whose lives they insured were so hardy, they would have put their money elsewhere, the suit says.

Cassidy was the sole physician used by Life Partners to make life expectation estimates, even though the suit says he had no actuarial training and spent “mere minutes on each medical history file” and provided “unsound and deceptive life expectancy estimates.”

Texas regulators, in a separate action, said that many of Life Partners' insured lived twice as long as projected, severely reducing the effective percentage rate earned by investors.