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Consider Beneficiaries When Helping Seniors Sell Policies

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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.

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.

Traditionally, the typical affluent senior market client has been someone like John Doe, a retired businessman with a clear-cut beneficiary situation. He fought in the war and came home to marry his high school sweetheart, to whom he is still married. He built a steady business with the help of his two fine, loving, non-litigious children. The family gets along well and simply wants to do what is fair and right.

But some affluent clients have more complicated relationships and beneficiary profiles. Josh Doe is an example. He is a younger senior market client who sold flowers on the sidewalk in the 1960s. He has fathered one child out of wedlock and two more to two different wives. He and his partner own a web consulting firm where they use a second-to-die life policy to protect their interests.

An advisor dealing with the Josh Does of the world ought to look for divorce settlement agreements, child support agreements and business agreements that might give certain parties enforceable rights to the policy benefits, Friedman says. The advisor also ought to try to make sure that he understands who all of the beneficiaries really are, he says.

Although many beneficiaries will be happy to see policy owners getting something for policies sold rather than nothing, or a small cash value, in some cases, “the beneficiary may be out in the cold,” Friedman says.

Even if an angry child or other angry beneficiary appears to have no valid claim to the life policy benefits, “when people start fighting over their parents, they don’t necessarily care whether it’s cost-effective,” Friedman warns.

Even if a suit is doomed from the start, it could still waste the defendant’s time and money, he says.

Friedman suggests that advisors consider taking the following steps when helping older clients sell policies:

–Review policy beneficiary designations carefully.

–Use interviews and questionnaires to assess the client’s family dynamics and business situation.

–Ask, if possible, to review the client’s estate plan. (But Friedman notes that the value of reviewing estate plans might be limited, because clients can change their estate plans at any time.)

–Explain to the seller’s spouse, children and other potentially interested parties what is happening.

–Get policy beneficiaries and closely related heirs who are not beneficiaries, such as spouses and children, to sign release forms.

Getting release forms will not necessarily prevent angry children or others from going to court, but it could discourage the actual filing of such suits, by increasing the odds that courts will penalize the plaintiffs and their attorneys for filing frivolous claims, Friedman says.


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