Questions and concerns about the regulation and oversight of the growing market for life settlements have spurred two separate reports on that market in recent weeks.

Typically, under a life settlement, the owner of a life insurance policy sells it to a third-party investor in exchange for a lump-sum payment that exceeds the policy's cash surrender value, but is less than the expected payout upon death.

Concerns about abuses by intermediaries—such as charging policy owners excessive commissions, not seeking competitive bids from potential buyers, and not providing policy owners with all relevant information—were highlighted in an April 2009 report by the Senate Special Committee on Aging.

A General Accounting Office report estimates the total face value of policies settled in 2008 ranged from around $9 billion to $12 billion.

A report, prepared by a Securities and Exchange Commission task force created in 2009 to examine emerging issues in the life settlements market and to advise the Commission on ways to improve market practices and regulatory oversight, recommends that life settlements clearly be defined as securities to better protect investors.

The SEC task force suggests the Commission consider recommending to Congress amendments to the definition of "security" in the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940 to include life settlements, which it says would clarify the legal status of life settlements, and provide for more consistent treatment under both federal and state laws.

The report notes that, while 45 states have adopted some form of life settlement legislation under their insurance laws, and 48 states treat life settlements as securities, the ways states enact those laws varies. In addition, life expectancy underwriters aren't subject to significant regulation at the state level.

The amendment would bring intermediaries in the life settlements market under the jurisdiction of the SEC and the Financial Industry Regulatory Authority FINRA, and require them to register with the SEC and a self-regulatory organization. It would also require all offers and sales of life settlements to be registered with the SEC, unless an exemption is available. In addition, any mis-statement in the offers and sales of life settlements would be covered by the anti-fraud provisions in the Securities Act. The amendment would also mean that a pool of life settlements issuing interests in the pool would be an investment company under the Investment Company Act, unless it falls within an exemption.

The task force report also recommends that the Commission:Instruct the staff to continue to monitor that legal standards of conduct are being met by brokers and providers;Instruct the staff to monitor for the development of a life settlement securitization market; andEncourage Congress and state legislators to consider more significant and consistent regulation of life expectancy underwriters.

In line with another recommendation in the report, the SEC recently issued an investor bulletin about investments in life settlements.

Meanwhile, the GAO released its own study looking at how the life settlement market is organized and regulated. That report noted that, due to inconsistencies in the regulation of life settlements, policy owners in some states "may be afforded less protection than owners in other states and face greater challenges obtaining information to protect their interests."

GAO noted that policy owners could complete a life settlement without knowing how much they paid brokers or whether they received a fair price, could face challenges obtaining adequate information about life settlement investments, and due to conflicting court decisions and state law differences, individuals in different states with the same investments could be afforded different regulatory protections. Inconsistencies in laws across states could also pose challenges for life settlement brokers and providers.

The watchdog agency said two key elements of its framework for assessing proposals for modernizing the financial regulatory system—consistent consumer and investor protection and consistent financial oversight for similar institutions and products—have "not been fully achieved under the current regulatory structure of the life settlement market."

"Congress may wish to consider taking steps to help ensure that policy owners involved in life settlement transactions are provided a consistent and minimum level of protection," the report states. For instance, the GAO noted that, in another recent report, it suggested Congress consider the advantages and disadvantages of providing a federal charter option for insurance and creating a federal insurance regulatory entity to help harmonize insurance regulations.