5 pitfalls to avoid when assisting clients with a life settlement

Advisors can help clients weigh the costs and benefits of their policies

A life settlement is a valuable strategy to help clients at risk of letting a policy lapse manage to capture some benefits rather than forfeiting them back to the insurance companies. (Photo: iStock) A life settlement is a valuable strategy to help clients at risk of letting a policy lapse manage to capture some benefits rather than forfeiting them back to the insurance companies. (Photo: iStock)

There is a peculiar paradox in the financial advisory world: Ninety percent of seniors who lapsed a life insurance policy would have considered a life settlement had they been aware of the possibility. Yet 65 percent of financial advisors have never recommended a life settlement to a client, but claim they would do so under the right circumstances.

Unfortunately, each year more than $100 billion face value of life insurance lapses by seniors over the age of 65, mostly from a lack of knowledge that an unneeded or unaffordable policy may be sold. A life settlement is a strategy for helping your client capture some of those benefits rather than forfeiting them back to the insurance companies.

Related: The life settlement market is heating up

Based on conversations with hundreds of financial advisors and life settlement industry professionals, I believe a key explanation for this disconnect is that most financial advisors simply lack enough information about how to evaluate a life insurance policy as an asset in their clients’ portfolios. Like all other assets, these policies have a strategic purpose in addition to costs and benefits, and can be sold by the client if the asset is no longer serving its purpose.

Here are five common pitfalls that have been known to ensnare professional financial advisors when working with their clients on possible life settlement transactions:

5. Promising the moon

Most advisors instinctively understand the importance of giving their clients untarnished information about potential outcomes with financial planning strategies so they can make objective and even-tempered decisions. Unfortunately, in their excitement over the possibility of helping their clients uncover a hidden asset, some advisors make the mistake of promising them the moon — only to end up disappointed if the policy isn’t worth as much in the secondary market as they hoped. Strive to under-promise and over-deliver, rather than the other way around.

Related: 3 reasons to consider life settlements for your senior clients

4. Turning a blind eye to premiums

If premium payments aren’t kept current on a life insurance policy, its value will already be diminished before you even begin to investigate the secondary market. In fact, many insurance companies won’t even bother to verify coverage, let alone process a change in ownership, if the policies are delinquent. Moreover, if your client ultimately chooses to sell their policy, it will be their responsibility to continue making premium payments until the policy ownership has officially changed.

The takeaway: Don’t turn a blind eye to premiums.

Make sure to vet potential life settlement professionals with a few quick questions to verify they follow key ethical standards and best practices. (Photo: iStock)Make sure to vet potential life settlement professionals with a few quick questions to verify they follow key ethical standards and best practices. (Photo: iStock)
 

3. Working with just any life settlement broker

Financial advisors understand they need to work with a professional who specializes in the life settlement industry in order to explore a possible transaction for a client. But some of them make the mistake of assuming that anyone with experience in the field is as good as the next person on the internet. Not so. Make sure to vet potential life settlement professionals with a few quick questions to verify they follow key ethical standards and best practices:

Are they a member of the Life Insurance Settlement Association? Are they fully licensed or do they use borrowed licenses? Have they ever had a licensed revoked or suspended? These simple questions could yield valuable information.

Related: Life settlement = solution to rising senior health care costs

2. Trying to hide details

Just like any other significant financial transaction, there will be specific disclosures that your client will need to make if a potential buyer expresses interest in making an offer to purchase their life insurance policy. This is an important component of the process as it represents the only opportunity a buyer has to get their arms around key facts about the policy, such as whether there are any loans against the policy, whether the policy owner has changed before, etc. Don’t get caught in the pitfall of trying to hide any details you think may reduce the market value of the policy. It will only backfire on you — and your client — when that hidden information comes to light.

Related: Life settlements and your fiduciary responsibility

1. Fumbling the ball

There are a number of moving pieces involved in a life settlement transaction, some of which will require you and your client to be sensitive to deadlines and tight document turnarounds in order to keep the process moving efficiently. This is not only important to prospective buyers who want to invest their money wisely in deals that can be closed without delays, but is also in your client’s best interest in order for them to receive their cash payment faster. Avoid the mistake of fumbling the ball on these timely requests for documents and signatures.

Darwin M. Bayston is president and CEO of the Life Insurance Settlement Association.

See also:

5 reasons why life settlement auctions don't make sense

The value of cash value life insurance

Here's why cash value life insurance is a superior product

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