When considering a life settlement arrangement for clients, financial professionals need to be able to assess the ethical practices of the players in this new and innovative industry. This article looks at some of the key due diligence issues this review should cover.

First, a brief history. Begun in the late-1990s as an outgrowth of the viatical settlement industry, life settlements entail the sale of an existing life insurance policy by the owner to a third party. In return for a cash settlement, the policyholder transfers ownership and all other rights of the policy to that third party. This allows the policyholder to receive cash for a life insurance policy that is no longer needed or cost-effective.

Unlike viatical settlements, life settlements contain no requirement that the insured be terminally ill.

Life settlements are typically generated through insurance agents, brokers and other financial professionals who send an application on behalf of the client to the life settlement company or “originator.”

However, before any of this can occur, financial professionals should be mindful of the ethical practices of the originators whom they are considering for the arrangement. Here is a framework to follow:

Determine the source of the originators funding.

During the peak of the viatical business in the early 1990s, various players typically bundled several life insurance policies and sold them to individual, or “retail,” investors, who were lured by a supposed high rate of return.

However, besides offering unreliable funding, this practice created the potential for privacy concerns, since the individual investors had a direct stake in the insured. Further, this practice has led to a series of well-documented abuses by both viatical companies and fundraising affiliates, causing the industry irreparable damage.

A more preferable funding method–and one that assures clients privacy needs are being met–is when “institutional” investors provide life settlement companies with the necessary funding for backing the life settlement offer and payment of future premiums. Institutional investors include commercial and investment banks and insurance and reinsurance companies.

Learn how to recognize a true “institutional investor.”

The institutional investing spectrum is filled with many gray areas. For starters, some companies engage in questionable, limited ventures where the funding itself is not clearly identified, forming trusts and limited liability corporations referred to as “institutions” but still utilizing retail investors.

Before entering into an agreement, therefore, it is wise for the financial advisor to ascertain whether all of the originators funding truly comes from valid, fully disclosed institutional sources.

Also, it is not uncommon to see life settlement originators touting financial backing from an unnamed “large AAA-rated institutional lender” or offering a list of several organizations. When exploring life settlement originators, look to companies who stand shoulder-to-shoulder with their institutional partner. This demonstrates confidence, stability and dedication to future growth opportunities on the part of both the originator and the financial institution.

Be mindful of state regulations.

Besides keeping aware of the practices listed above, financial professionals should also remain mindful of state regulations concerning the life settlement industry. Sixteen states currently have statutes addressing life settlements. Due to the industrys rapid growth, more are soon to follow.

Therefore, before pursuing an opportunity for the client, financial professionals should contact the state insurance department to learn if there are any current or proposed regulations governing life settlements and, if so, what are its provisions.

In sum, your settlement company provider should be able to identify a transparent, consistent and credible funding source, and commit to ensuring that the clients privacy needs will be met. In addition, the settlement company should actively support initiatives aimed at promoting a high degree of professionalism in the life settlement industry.

These measures will help you perform appropriate due diligence. As you move through the steps, you will be able to understand how life settlements, when utilized properly, can offer clients a preferable alternative to surrendering their life insurance polices.

This is an innovative tool that can open the door to more beneficial financial planning opportunities for your client and for you. It positions agents and brokers as creative problem solvers.

Mark Berlin is a founder, president and CEO of Centre Life Finance Limited, Minneapolis, Minn. Kevin Glowacki is vice president-operations, and Bob Miller is chief marketing officer, of the same company. Their respective e-mail addresses are: mark.berlin@centrelife.com, kevin.glowacki@centrelife.com and bob.miller@centrelife.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.