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Life Health > Life Insurance

The Settlement Advisor And Fiduciary Concerns

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If you want to help clients sell unwanted life insurance policies, you may want to learn something about life settlement agents and brokers legal responsibilities.

A life settlement is a relatively simple transaction involving the sale of a property right, of a life insurance policy, through 3 primary parties.

The parties are the current owner of the policy, a third-party agent or broker, and the life settlement provider that purchases the policy.

The agent or broker acts as a fiduciary of the owner and negotiates with providers to get the best possible offer for the owners policy. The purchase price is almost always less than the face value of the policy but more than the cash surrender value.

Because an insurance policy is a capital asset owned by an individual, trust or other entity, one might compare the structure of a life settlement transaction to the process of selling other high-value assets, such as houses.

Like a homeowner selling a house, a policy seller needs help from a knowledgeable professional who is paid to act in the best interests of the seller and understands the complexities involved with the disposition of the property.

From the standpoint of the original policy owner, completing a life settlement transaction is similar to surrendering the policy.

Once the deal is completed, the original policy owner receives a large sum of cash and can stop making premium payments.

The new owner of the policy, the life settlement provider, starts paying the premiums and, eventually, collects the policy death benefits.

Of course, completing a life settlement is different from surrendering a policy. One difference is that the policy remains in force. The provider must support the policy. The second difference is that, in most cases, the original policy owner gets a much higher price than the owner would have received if the owner had surrendered the policy to the insurer.

An agent or broker usually starts the life settlement process by seeking competitive bids from providers.

Today, regulation of the life settlement industry is not the same in all states, and some states do not regulate the industry at all. Because of those differences, it is imperative that an agent or broker solicit bids only from providers that are both experienced and ethical.

A policy owner who goes through the standard bidding process must submit a questionnaire and authorize medical releases. The releases must comply with the privacy provisions of the Health Insurance Portability and Accountability Act of 1996, and all parties involved in the transaction must keep the information submitted confidential.

To ensure that the parties respect the policy owners confidences, it is essential that the agent or broker seek bids only from reputable providers that have proven track records of complying with the law and adhering to high ethical standards.

When lawyers conduct lawsuit settlement negotiations, they must share all offers with their clients. Similarly, agents or brokers helping with life settlement transactions must share all offers with policy sellers. The seller has the ability to make the final decision on which offer to accept.

To help the owner fully understand the structure of an offer, some states require the agent or broker to furnish the amount and method of calculation of the agent or brokers commission. Other states require only that the agent or broker furnish that information if the policy seller asks for that information.

A financial advisor who is helping a client evaluate life settlement offers should help the policy seller consider factors such as provider licensing, availability of institutional funding and the strength of the providers compliance department, as well as price.

Within 3 days after the seller has accepted an offer, the provider should transfer the purchase price to an escrow account. The policy seller then will have access to the funds within 3 days of the escrow agent receiving confirmation from the insurance company that title to the policy has been transferred to the provider.

After the transaction is completed, the provider may begin to call upon the insured or named representative of the insured to ask about the insureds health.

The agent or broker should make sure that the policy seller understands that, in states with life settlement regulations, the seller is entitled to a grace period, or a rescission period. During this period, the policy will revert to the possession of the policy seller if the seller chooses to cancel the transaction within 15 days of the date on which the funds were made available to the seller.

Furthermore, the policy seller is automatically entitled to the policy death benefit if the insured perishes within 15 days of the date on which the funds were made available to the owner. If the seller dies during the 15-day grace period or cancels the transaction, the provider must be reimbursed for the purchase price paid and for any premiums paid to keep the policy in force.

is assistant to the president at Life Equity L.L.C., Hudson, Ohio, a life settlement provider. He can be reached at [email protected].

Reproduced from National Underwriter Edition, April 29, 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.


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