Death Craps Out With Viatical Settlement Dice

April 9, 2019

In the end, we all die; but in that end, there may be some opportunities for third parties to make a profit from your death. Only Wall Street would run such a macabre casino. In a recent FINRA regulatory settlement, we come upon the somewhat ghoulish business of viatical settlements. If the odds work out in your favor, your parlay should yield a profit; however, sometimes folks die sooner than expected and upend all the mortality tables underpinning the investment. Then again, even if the die come out in your favor on a viatical settlement, you're going to die also, and maybe some investor will place a bet on your life expectancy, and, wow, it could go on and on and on like that! Frankly, it's a sucker's bet because no matter what, Death always wins in the end. 

Case In Point

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Scott P. Klor submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Scott P. Klor, Respondent (FINRA AWC 2017054221601, April 4, 2019)

The AWC asserts that Klor entered the industry in 1994, and by March 2011, he was registered with FINRA member firm LPL Financial LLC. 

Elderly Individual with Terminal Illness

The AWC asserts that during the relevant period between roughly September 2010 and December 2012, Klor solicited investors (among which were LPL customers) for viatical settlement transaction in which investors purchased the life insurance policy for an amount that exceeded the policy's surrender value but was less than the expected death benefit. Allegedly with Klor's assistance, the investors formed an LLC to purchase a variable life insurance policy on the life of an elderly individual with a terminal illness at a cost of $1.4 million. Excluding Klor's wife, seven individuals became members of the LLC, but only five of these individuals (two of whom were LPL customers) made monetary contributions to the LLC. Those five investors collectively owned about 90%percent of the LLC and personally guaranteed a $2 million loan taken by the LLC to purchase the policy and to make future premium payments on the policy. The LLC's Managing Member was an executive with a bank for which Klor was an independent contractor. 

SIDE BAR: "Investor Bulletin on Life Settlement" (SEC Investor Alerts and Bulletins) offers some excellent guidance on life settlements. In pertinent part:

What is a life settlement?
In a "life settlement" transaction, a life insurance policy owner sells his or her policy to an investor in exchange for a lump sum payment. The amount of the payment from the investor to the policy owner is generally less than the death benefit on the policy, but more than its cash surrender value. The dollar amount offered by the investor usually takes into account the insured's life expectancy (age and health) and the terms and conditions of the insurance policy.

Why would a policy owner wish to sell a life insurance policy?
Due to changed family or other circumstances, a life insurance policy owner may no longer need the insurance provided by the policy. A spouse may have died, children may have grown up, or a company with life insurance on a key officer may have been sold or gone out of business. Other policy owners may have difficulty making premium payments or simply need cash. In such circumstances, many policy owners surrender their policies or let their policies lapse by ceasing to make premium payments. Selling a policy to an investor may be another alternative. Such sales may be made through life settlement brokers who charge commissions. . .
. . .

Considerations for investors in life settlements
Before investing in a life settlement, investors may wish to keep the following points in mind.
    • The return on a life settlement depends on the insured's life expectancy and the date of the insured's death. As a result, the accuracy of a life expectancy estimate is essential. If the insured dies before his or her estimated life expectancy, the investor may receive a higher return. If the insured lives longer than expected, the investor's return will be lower. If the insured lives long enough or if life expectancy is miscalculated, additional premiums may need to be paid and the cost of the investment could be greater than anticipated. . .

The AWC asserts that Klor  used his firm email account to communicate with investors regarding the transaction; and he received a 4% interest in the LLC, which he requested be placed in his wife's name. Further, the AWC asserts that Klor:
  • communicated with potential investors regarding the policy, 
  • assisted in making sales presentations regarding the proposed viatical settlement, and 
  • consulted with professionals regarding the formation of the LLC. 
For several years, while the insured remained alive, the LLC made quarterly premium payments on the policy and interest payments on the loan. By January 2015, Klor's wife no longer had an ownership interested in the LLC. 

No Notice

Klor did not notify LPL of his involvement in the viatical settlement. Additionally, from 2013 through 2016, Klor falsely stated "NO" in  responses to questions on LPL's annual compliance questionnaires about whether he had ever participated in a viatical settlement or a joint venture involving the pooling of investor funds for a common purpose. 

May 2017 Termination

On May 9, 2017, LPL filed a Form U5 terminating Klor's registration on the basis that Klor violated "Firm policy regarding private securities transactions." 

August 2017 Death

In August 2017, when the insured had died, the death benefit on the policy was worth less than the total amount invested. The AWC alleges that each of the five majority members of the LLC lost over $200,000. 


FINRA deemed that Klor failed to notify LPL of his participation in a private securities transaction in the form of the viatical settlement as required under the then-effective NASD Rule 3040, and in violation of FINRA Rule 2010.  In accordance with the terms of the AWC, FINRA imposed upon Klor a $5,000 fine and a 14-month suspension from association with any FINRA member firm in any capacity.

Bill Singer's Comment

As noted in part in FINRA's "Seniors Beware: What You Should Know About Life Settlements" (FINRA Investor Alerts)

Older Americans might hear about opportunities to sell their existing life insurance for cash in transactions known as life settlements. A life settlement, or senior settlement, as they are sometimes called, involves selling an existing life insurance policy to a third party-a person or an entity other than the company that issued the policy-for more than the policy's cash surrender value, but less than the net death benefit.

Life settlements can be a valuable source of liquidity for people who would otherwise surrender their policies or allow them to lapse-or for people whose life insurance needs have changed. But they are not for everyone. Life settlements can have high transaction costs and unintended consequences. And even if you decide a life settlement is generally right for you, it can be hard to tell whether you are getting a fair price.

If you are considering selling your life insurance policy to a third party, you can help protect yourself by familiarizing yourself with your existing policy so that you fully understand your options, becoming fully informed about life settlements, shopping around for the best offer, and dealing only with licensed buyers and brokers. We are issuing this Alert to highlight the questions you should ask and the factors to consider before entering into a life settlement. . . .

Also consider "Variable Life Settlement Transactions / FINRA Reminds Firms of Their Obligations With Variable Life Settlement Activities" (FINRA Notice to Member 09- ), which states in part:

Executive Summary 

Sales of existing life insurance policies to third parties-referred to as life settlements-have increased in recent years and the trend appears likely to continue. FINRA is concerned about variable life settlements because they involve materially different factors and raise materially different issues than more widely held securities such as stocks or bonds. Additionally, firms'marketing of variable life settlements is directed almost exclusively toward senior investors who, concerned about current economic conditions and retirement, may consider selling their variable life insurance policies without fully appreciating the risks and costs of variable life settlements. . . .