LSInsights - Press Release

 Published 8/16/04 (source: www.insurancenewsnet.com)

LIFE SETTLEMENT: INSIGHTS FOR YOUR CLIENTS

by I. James Cavoli

Each year, about $1.5 trillion of life insurance is surrendered or allowed to lapse.  For many policy owners this could be a costly mistake.  When a policy lapses, the owner is often left with nothing.  Cash surrenders can also be unattractive, as the cash offer comes only from the issuing life insurance carrier.  Now there is a third option for some people:  life settlements.

A life settlement is the sale of a life insurance policy to an unrelated third party.  The amount of the settlement is based on the present value of the net death benefit, less the future premiums.  The typical life settlement transaction yields values 4 to 5 times higher than cash surrender value.  The best candidates for life settlements are those with life expectancies under 12 years and policies with more than $200,000 in face value.  Typically, these requirements make life settlements most attractive to older clients.

Many advisors simply ignore the life settlement option for their clients.  Often, this is due to a lack of knowledge about the market.  Sometimes it’s due to a negative bias, poor previous experience, or limitations imposed by the carriers they represent.  Whatever the reason, advisors should consider carefully their responsibility to their clients.  Life settlement transactions are projected to reach nearly $150 billion in the next few years.  As life settlements grow in popularity, clients will become aware of life settlements and expect to be advised about the option.  In the extreme, advisors could be held legally liable for ignoring the potential benefits of the life settlement option.

In fact, many trustees are analyzing their trusts to determine if market values exceed cash surrender values for policies that are no longer being funded or are in danger of expiring.  Previously, they were able to simply let policies expire or take cash value from the carriers.  Today, faced with the specter of legal action, many trustees are scrambling to determine market values of policies held in trusts.

Beyond agent fiduciary responsibilities, life settlement can produce substantial financial benefits as well.  Not only do clients enjoy a financial windfall, but your practice benefits in several ways.  First, your reputation with your client is enhanced through the application of this technique on their behalf.  Also, you can earn commissions on the life settlement transaction itself.  Most often overlooked, however, is the fact that renewal commissions will continue on the policy and persistency bonuses can be retained.  Finally, there may be subsequent sales opportunities.

The secondary market for life insurance has developed considerably from the old “viatical days.”  In the early days of viatical transactions, there was considerable fraud and chicanery.  However, the fraud was perpetrated on investors rather than sellers.  Much of the bad press came from promoters who raised cash based on unrealistic promises and from companies that misappropriated investors’ funds.

Today’s market is much more heavily regulated.  It is populated with institutional investors and professional brokers.  The life settlement transaction is a financial sale among sophisticated parties with abundant safeguards.  The NAIC has created a model act which has been adopted in many states.  The act regulates investment activities, licensure, and the closing requirements of life settlement transactions.  While some states have not yet implemented the model act, reputable industry players will apply the Model Act’s standards in all states. 

The best way to approach the secondary market and obtain the best results for your clients is to engage a reputable broker.  Brokers know the life settlement market place and can help generate the highest offers for your clients’ policies.  A reputable broker will be aware of which buyers have access to institutional funding and can assemble a group of buyers to bid against each other for the policy.

A good broker should:

• be licensed in your state, should know the market and the key players,
• be able to pre-qualify your clients for life settlement transactions,
• be able to define his fee before entering into a transaction,
• bid your clients’ policies to multiple buyers, and
• provide you with updates and assistance throughout the process. 
  

Your state department of insurance is a good place to check for licensed brokers in your area.  Be sure to ask plenty of questions before and during the process.