Life settlements seem to be moving into the mainstream this year for life insurance agents and others who advise older clients about their finances.
In markets such as Fort Lauderdale, Fla., newspaper ads offering to help older consumers sell unwanted life policies sometimes seem to be as common as ads promoting annuities or long term care insurance.
One area that could distinguish careful, knowledgeable advisors from the order takers is awareness of the importance of guarding against any potential problems with policy beneficiaries, experts interviewed say.
States with laws governing life settlement transactions and viatical settlement transactions usually say the policyholder who sells a policy must have “an irrevocable right under the policy or certificate to name the beneficiary.” This is the definition language used in statutes from states such as Montana and Oregon.
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Some life settlement providers take extra steps to make certain that policy beneficiaries approve of the fact that policy owners are trying to sell the policies.
Coventry First L.L.C., Fort Washington, Pa., gets release forms from policy beneficiaries. It also conducts interviews to make sure that policy owners and insureds, if the insureds are different from the policy owners, understand what is happening, according to Coventry First Chief Executive Alan Buerger.
In some cases, policy owners are simply selling policies to replace the policies with bigger or better policies, Buerger says.
But, even when older policy owners, or trusts that own policies insuring older consumers, are selling the policies to generate cash and have no plans to replace the policies, children and other heirs are often happy to see that the seller will be getting something more than a policy’s cash surrender value, Buerger says.
At this point, life settlement beneficiary problems seem to be extremely rare. Robert Friedman, an attorney in the New York office of Katten Muchin Rosenman L.L.P., says he has not yet heard of any cases arising from life settlement beneficiary disputes.
But financial advisors who are aware of beneficiary problems that have cropped up in other contexts may be in a good position to keep similar problems from complicating life settlement deals, Friedman says.
One principle is that spouses may have enforceable rights to a share of the estates of their husbands or wives, but adult children rarely do, Friedman says.
Outside of Louisiana, which does impose some limits on parents’ estate planning moves, “a person is free to disinherit their children,” Friedman says.
On the other hand, contracts and earlier court actions could give some parties unusual, enforceable rights to life policy benefits, Friedman says.