One of the requirements for disclosure in many life settlement regulatory systems is telling a seller that “a stranger will own your life insurance” which raises the concern that a stranger will hold not only the policy, but all of the personal information that went into it.
However, those who bring policies to the market say there are significant protections in place to ensure that access to a policyholder’s information is kept as limited as possible, and that the fears of an insured’s private medical information falling into the wrong hands are largely unfounded.
Among the most fundamental legal protections for safeguarding personal information are the federal requirements established by the Health Insurance Portability and Accountability Act, or HIPAA.
“We’re required to keep everything confidential,” said Ronnie Katz, founder of Memphis-based Settlements for Life, adding that life settlement transactions are required to include disclosure notices and waivers for information sharing. “It’s just as you’d see in a doctor’s office.”
There is a fair amount of personal information involved in a life settlement transaction, Katz noted, adding that this generally involves demographic information, such as the policyholder’s name and address. But, this will also include confidential information such as the Social Security number and birth date of the policyholder. “In most cases they will see the demographic,” he said.
Harry Beck, executive vice president at San Francisco-based Provada Insurance Services Inc. argued that given the equal requirements on both types of transactions, a life settlement is no different in terms of privacy than the purchase of a life insurance policy from an insurer.
“The ‘lack of privacy argument’ in a life settlement is fallacious because the process is similar to purchasing life insurance,” he said, adding that the same release forms and mortality determinations are required for both. “A good life insurance broker is no different that a good life settlement broker since both will ‘shop’ the policy to get the ‘best price’ for their client.”
Stuart Hersch, a managing director at Cantor Life Markets, said that in states where life settlements are regulated, the buyer is entitled to see the full file of the policyholder. “Once the trade happens, the provider gets the complete files with the names in it because that’s required by law,” he said.
Even there, however, Beck noted that the ultimate source of the funding may not be seeing the information. “Most funders use an escrow agent, often times Well Fargo, that acts as a buffer between the funding source and the insured,” he said.
Furthermore, Beck argued that most funders of life settlements are not interested in the specific people whose policies they are buying.
“Funders know they are investing in an asset class–life settlements–that will pay them a reasonable but uneven return over a number of years,” he explained. “Their main concern is that the rate of return assumption of the investment pool, which is usually 200 times larger than the average policy size, is met.”
In fact, Beck said, the buyers in a life settlement have only one need–to know who the insured is–so they can file a claim when the time comes to do so, and even that process is typically done separately.
“The escrow agent hires a corporate entity to enquire about the health status of the insured on a regular basis, usually quarterly,” he explained. “This is done by contacting people provided in writing by the insured. Contacting the insured in a life settlement to determine his or her health status is similar to what a carrier does after issuing a single premium immediate annuity. Purchasers of life insurance policies don’t want to make payments after the insured dies, and carriers don’t want to make SPIA payments after the annuitant dies.”
Whether or not the interest in an insured is there, Hersch said that maintaining a wall of privacy is a key priority for Cantor, even from those who are conducting the transaction.
“We have a very stringent internal and external policy” to protect the seller’s privacy, he said.
Once a policy comes in, he said, it is moved to a separate system maintained by Cantor known as LexServ. There “the files are immediately redacted” removing any trace of identifiable information such as names, birth dates, Social Security numbers, or even identifiers used by healthcare providers such as file or lab numbers. “The only one who knows the name of the person is the person doing the redacting,” he said.
The system, according to Hersch, is designed to ensure that those in the market can see what they are buying, but not who. “You may see thousands of pages” of medical information, he said, including life expectancy reports, but any personally identifiable information is blacked out.
Hersch noted that there are roughly 28 to 30 states that currently regulate life settlements, with the number rising. In those states that are still unregulated, he said, the buyer can seek to keep their information private even after a sale has occurred.
Overall, he said, “we think anonymity is the best way” during the sale, but he added that keeping that anonymity can have consequences. “If a seller wants it protected afterwards we will do that, but we will advise them that it could have an effect on the sale price.” Some buyers, he said, will shy away from policies in which the seller remains unknown even after a deal has been reached.
Because of its proprietary system, Hersch said there is little an agent could do when bringing a policy to the secondary market through Cantor that would aid the process.
“Our system doesn’t have anything more that can be done to protect their privacy,” he said. “There’s nothing they can do to make it more anonymous.”
Katz said his firm is also capable of doing “everything on a case, from start to finish,” but takes a different stance on the subject of a referring an agent’s role in the process.
Agents, Katz noted, can and often do aid in that process by coming in prepared. “In many cases, the referring agent can assist us by providing us with the records,” he said, that will save the life settlement broker from having to seek out and compile the policyholder’s medical information.
While it may not sound like much, Katz said that providing medical records at the initial contact with a life settlements broker “greatly streamlines the process.” There is a great disparity between doctors in terms of their ability to provide records, he said, and agents who are able to provide those records upfront can reduce the amount of time needed for a transaction by as much as a month.