Be Sure To Give Clients The Life Settlement Option

By A. Mark Berlin Jr.

Although life insurance is intended as a safeguard against the unforeseen and an essential portfolio component, an unneeded or ineffective policy quickly can become a financial liability. If this occurs, a trusted advisor must be willing and adequately prepared to explore all potential options, including life settlements.

Here, I will examine situations when a life insurance policy may no longer be appropriate and discuss potential solutions, as well as how to determine if life settlements are suitable for both you and your client.

Unnecessary Policies And Necessary Solutions. Just as there are many varying circumstances that may determine that a life insurance policy is no longer useful, a whole host of innovative options exist to meet a clients changing financial needs.

Depending on multiple variables, including the clients particular motivation to divest himself of a policy, accelerated death benefits, loans and partial surrenders, 1035 exchanges, annuity transfers and nonforfeiture values all may be explored in addition to life settlements.

Prior to the emergence of the aforementioned options, when a life insurance policy was no longer needed or cost effective, typically there only were two choices–surrender the policy, or stop paying the premiums and eventually let it lapse. But now with the introduction of life settlements, which involves the sale of an existing life insurance policy by the owner to a third party, clients now have the choice of receiving a cash settlement.

Regardless of which option you ultimately pursue on behalf of your client, the following are some common examples of when a life insurance policy may have outlived its usefulness:

Changes in the estate requiring less insurance coverage, if any;
Premiums becoming cost prohibitive;
Outliving intended beneficiaries or the needs of the beneficiaries have changed;
Policy performance has not met expectations and will require increased premiums;
Level term policies where the level premium period is ending, causing rapid premium increases;
Buy-Sell funding where owners have retired or the business is sold;
Deferred compensation plans where the executive has left the company;
Key person policies where the insured has retired; and,
Policies that were purchased to cover loans that have since been paid off.

If any of the above circumstances determine that pursuing a life settlement is an appropriate option, once the settlement is obtained the monies can then be utilized in a variety of ways. For example, the capital can be put toward more suitable insurance products such as annuities, long term care, or survivorship life; used to fund other investment opportunities such as stocks, bonds, or mutual funds; or gifted to family members or charities.

Importantly, regardless of how the settlement funds are eventually utilized, financial professionals can create satisfied clients who generate referrals.

Moving Ahead–What You and Your Clients Need to Know. Life settlements, when utilized properly, can offer a preferable alternative to surrendering policies, and as demonstrated in my example (see sidebar), help open the door for more beneficial investment opportunities. But life settlements are not appropriate for all clients, and determining the proper candidates is crucial.

In addition, financial professionals should be advised to perform necessary due diligence before establishing a relationship with a life settlement originator.

Attention to the following can help determine whether pursuing a life settlement is a suitable option for all involved:

Determine appropriate prospects beforehand. A typical prospect for a life settlement fits within a very specific category–usually, a person over age 65 who no longer has a need for his life insurance policy and has had a decline in health since the policy was first issued. Therefore, it is imperative that you determine a potential fit before pursuing a life settlement directly with a client.
Establish parameters. When speaking with a prospect, offer detailed information as to how a life settlement works, using case study examples to illustrate your points. Remember that providing as much up-front information as possible will ultimately benefit both you and your client.
Whenever possible, work with experts. As many of you no doubt are aware, the life settlement industry has an air of mystery about it. Unfortunately, much of this is because of viatical fraud cases in the 1990s as well as using individual investors as funding sources, which still continues today. As such, besides looking for transparent institutional funding, make every effort to work with seasoned professionals who are committed to the long-term future of the life settlement industry.

There now is a full range of options available for clients possessing life insurance policies that have outlived their usefulness. And whether pursuing a life settlement or any other available alternative, being armed with the appropriate knowledge will determine the future success of both you and your clients.

A. Mark Berlin Jr. is founder, president, and chief executive officer of Centre Life Finance Limited, Minneapolis, Minn. He can be reached at mark.berlin@centrelife.com.


Reproduced from National Underwriter Edition, March 17, 2003. Copyright 2003 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.