Agents Walking A Tightrope On Life Settlements

Agents who are counseling their clients about life insurance are not required by law or regulation to present the option of selling their policy in a life settlement, but many believe it is in their best professional interests to do so.

“I don’t know if obligation is the right term,” said Robert Nelson, vice president and life and estate planning division manager for the Grace/Mayer insurance agency in Omaha, Nebraska, of an agent’s duty regarding life settlements.

However, he noted that he had “built a practice, and many others have too,” by ensuring that clients have all of the possible options before them. “I don’t know how I could not let them know about a viable option and still hold myself out as a professional,” he said. “I wouldn’t go mandating anything, but I think it’s the difference between one set of advisors and another.”

Some agents, however, are barred from raising the issue of life settlements with their clients by their carriers, to the point where doing so could even be grounds for termination.

Nelson argued that agents who find themselves in that situation could provide a reference to an agent free to discuss the life settlement option, just as an agent who does not sell Medicare supplementary coverage might recommend an agent who can help a client procure that coverage.

“This is not rocket science,” he said. “It might be a young business, but it’s a fairly established business.”

Former Illinois Insurance Commissioner Nat Shapo, now serving as chief compliance officer for the Coventry Group in Philadelphia, also noted the difficult position of agents who are prohibited by their carriers from discussing life settlements, and the effects of that position on those carriers.

“Agents are trained and licensed to give full information about their clients’ insurance contracts terms and benefits,” he said. “Anything that prevents them from doing so puts them in an untenable position.”

That surrender values are generally significantly lower than the final benefit of selling a policy, he added, “creates a bad picture” when insurers are the ones trying to keep agents from counseling about life settlements.

But one argument against life settlements, according to John Skar, chief actuary and senior vice president at MassMutual, is that they are very rarely an appropriate measure for a client.

Skar said he’s examined many of the marketing materials offered by life settlement companies and concluded, “I don’t think it measures up to what agents and consumers need to know.”

Only a very few policies are actually eligible for life settlements, Skar noted, estimating the number at less than 1% of MassMutual’s in-force policies. “It’s not something that applies to many people,” he said.

Perhaps the greatest drawback for life settlements, he said, is the amount of transaction fees that would be incurred as part of a transaction.

“To sell a policy, you incur very high transaction fees, many times higher than virtually any other financial product,” he said, adding that in many instances these fees “are not disclosed.”

If a client were considering a life settlement, Skar said his advice would boil down to the simple question of whether the client has any sort of estate need, meaning, would they like to leave an estate to an heir or charitable organization? If the answer is yes, he said, then it would make sense to keep the life insurance policy and sell off other assets that would carry far lower transaction fees.

According to Skar’s estimate, “Around 50% of the estate value is destroyed in these transactions” involving selling a life policy. “This is the big message that’s not getting out to the consumers.”

For the “very, very small subset” of those with high value policies and no estate needs, Skar said life settlements would be an appropriate option. “We don’t think that’s going to happen very often,’ he said, estimating that perhaps 1 in 10,000 policyholders would fit that description. “We don’t think there are too many people with a million dollar policy and no estate needs.”

Douglas Head, executive director of the Life Insurance Settlements Association, said agents should be concerned about the consequences for themselves if they fail to bring up life settlements with a client who later finds that a life settlement would have led to more money.

When agents ask him what can be done, since they’re barred from offering life settlements, Head responds with a question of his own. “I ask them, ‘what will happen if you are sued by a client, for failure to disclose this as an option?’”

Usually, he said, they respond by saying their errors and omissions coverage would cover any award, but Head said he believes that E&O insurers won’t let the issue go forever. “Sooner or later, the companies that are providing the errors and omissions coverage are going to have to decide” if they should continue giving this coverage to insureds or adjust their rates.

Nelson does not view the issue as one of fearing a client might take action afterwards, instead seeing it from a more professional angle.

“Rather than saying should they or shouldn’t they take action, I’d turn it around,” and simply ask whether the agent had done their job. As an example, he noted that several years ago a client he’d sold a life policy to earlier called him in the early days of the life settlement business to ask about a policy for which he could no longer afford to pay the premiums. At the time, Nelson said he didn’t have any considerable knowledge of life settlements, and he told the client that although he should examine the life settlement option closely, it was a viable option. As a result, he said, “a $900,000 life policy with zero cash value was sold for $375,000.”

If, instead, he or another agent counseled against considering a life settlement, Nelson said, “I’d have to ask, what kind of damage have I just done to this person?”

Shapo echoed that sentiment, arguing that a professional would want to make sure they have done the most possible for their clients.