Given the relatively young age of the secondary market for life insurance policies, conducting due diligence is an especially important part of any transaction as the consequences are not necessarily clear should a claim be filed months or years after ownership of the policy has been transferred.
David-Irwin Binter, president of Neuma, Inc., a life settlement company based just outside of Chicago, says his firm looks at “all types” of details on behalf of buyers prior to going through with a sale. Binter will be speaking on the topic at the National Underwriter Life Settlement Summit in Philadelphia this week.
Primarily, he says, the risks for a buyer that need to be reviewed involve making sure the policy can be sold and that it was a legitimate insurance policy to begin with. What goes into that, he says, is making sure it was properly issued by the insurance company in a transaction where all of the involved parties that were supposed to be licensed were licensed, and that the original insurance applications were filled out properly and accurately by the seller’s insurance agent.
“You want to make sure the policy is valid and freely transferable,” he says.
Problems can and do occur, Binter says, in all of these areas, and in fact, he adds that “to say there’s a most common problem might be a little hard.”
Among the more common, he acknowledges, however, are inaccuracies in the documentation for a life insurance policy, or cases, where, as he puts it, “someone has been a little too sloppy.”
In general, Binter says most problems can be resolved fairly quickly, and that life settlement providers will work with agents to ensure that a transaction will still go forward.
“We will go back to agents,” he says, to ask for a clarification of any information that appears might raise a red flag further down the road.
Other problems, however, pose more of a challenge if they can raise questions of whether the policy should have been issued initially, such as a misstatement on the original application. “There are some things you can’t correct after the fact,” he says.
In such cases, a problem with the original application can get the life insurance carrier that issued the policy into the process, which carries with it the potential for a major roadblock in the path of the settlement.
If an insurance company raises questions about the legitimacy of a policy, Binter says, “they might get into this issue for years.”
Adding to the importance of ensuring a transaction will go smoothly, Binter says, is that the consequences of not doing so are uncertain as of yet. It’s one thing for a transaction to be stopped at the time of the sale, he notes, but it could be a far greater concern if problems come to light long afterward, or when the death benefit comes due.
“That’s a major question,” he says, which is not necessarily going to be settled quickly. Binter notes that cases on a number of contestability issues are making their way through the court system.
Given the severity of the potential consequences, the responsibility for ensuring due diligence has been done for a transaction, according to Binter, falls on the shoulders of all the players involved. “Everybody owns a piece of the transaction,” he says, including the seller’s agent, the intermediaries, and the buyer’s representatives.
Even in this, however, he notes that the changing nature of the life settlement market, particularly for the buyers, can raise questions.
“What if the buyer is sophisticated?” he asks, noting that many purchasers have knowledge and experience with insurance and investment issues.
From a regulatory perspective, Binter notes that there are different requirements in different states in terms of how much due diligence needs to be done. However, he adds that from his perspective the regulatory requirements should not be the focus during a transaction. Instead, he believes that those involved should be working with the goal of making sure no complications arise later that could ultimately spoil the deal.
“Obviously you have to meet whatever state requirements may exist,” he says. However, he adds, “the ultimate reason is that your client is going to want to get paid.”