"That's the risk that comes when due to fraud or a lack of insurable interest, the insurer doesn't pay the proceeds and the investor's premiums may--or may not--be returned," said Leimberg. "This is the problem investors face when greedy or less than careful buyers purchase 'Stranger Originated Life Insurance' policies."
Fourth is liquidity risk. "If for any reason investors can't pay premiums for as long as the insureds live, the policies may lapse--in which case investors may lose everything," said Leimberg.
And then there's risk that expenses will increase due to possible SEC oversight, though Leimberg suggests that that could be balanced by fewer frauds and better informed investors.
In addition, there are three "extraordinary" risks, according to Leimberg.
These include the promoter guaranteeing extraordinary returns which never materialize; the outright Ponzi scheme; and fraudulent life-expectancy valuations in which investors are led to believe insureds will die at a faster pace than underwriters think they will.
To Casey, there are even more disadvantages to these investments. There's withholding tax for investors in non-tax treaty countries. Plus, it's typically an asset that's long-term in nature, but one without a certain maturity. And there aren't many places to trade the life settlement. There's only what Casey calls an illiquid market for resale.
Put that together, and especially given the uncertainty over potential SEC regulation, the risks of life settlements are greater than the potential rewards.
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