Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Life Health > Life Insurance > Life Settlements

Integrating Life Settlements Into Your Practice

Your article was successfully shared with the contacts you provided.

As I set out to do this article to help agents cut through the confusion about life settlements in the life insurance industry, it turns out things were worse than I thought.

While doing my initial research, I called many of the major life insurance companies’ home offices and indicated that I was doing an article on life settlements and needed to know with whom I could speak. In almost all cases, I got calls back asking how they could be of assistance with my article about stranger-originated life insurance (STOLI). And herein lies the problem: If the industry is confused at the corporate level about the difference between STOLI transactions and traditional life settlements, I can’t imagine how the agent in the field, who is at best moderately familiar with life settlements, must feel.

Let’s begin with some terms that have become very recognizable in the industry as of late like STOLI, IOLI (Investor Owned/Initiated Life Insurance), Non-Recourse Premium Financing, etc. It is clear that most of the country’s life insurance companies and state regulators have deemed these “programs” to be unacceptable and have been doing everything possible to make them a thing of the past. The question that remains is what about traditional life settlements? What are the basic “rules of the road” set down by insurance companies, broker-dealers, and the Financial Industry Regulatory Authority as they apply to traditional life settlement transactions?

For the purposes of this article, we will define a life settlement transaction as the sale of an existing life insurance policy, which has been in force for over 2 years, to the secondary market. Let us further assume that the policy was not part of any non-recourse premium finance or stranger-originated life insurance program. The clients in our “traditional life settlement transaction” are looking for an exit strategy from their policy. Their need for an exit strategy could be for a variety of reasons:

–They no longer need their policy.

–They can no longer afford the premiums.

–They have a convertible term insurance policy that is about to expire and they can not afford the conversion premiums.

–A myriad of other reasons for which a policyholder might surrender or lapse their policies.

The primary goal of the life settlement transaction is to maximize the policy owner’s revenue, by obtaining more money on the secondary market than they would have received by surrendering the policy back to the insurance company for its cash surrender value (if any).

The first question that most agents or brokers ask is “Are life settlements a legal transaction?” As with most insurance issues, life settlements are regulated on a state by state basis. This means that each of the 50 states either have or will eventually have regulations that govern life settlement transactions. According to the Life Insurance Settlement Association, at the current time, 28 states have implemented regulations for life settlement transactions and many (if not most) of the others have legislation pending. This makes it clear that there is substantial authority on the state level for the legality and viability of traditional life settlements.

The next questions should be: “Based upon the rules of my primary insurance company and/or broker-dealer, am I allowed to participate in these transactions? And if so, what are the guidelines I must follow and how can I be compensated?”

This is where the situation gets tricky, primarily because each insurance company and broker-dealer has its own rules related to their agents and brokers participating in life settlements. In addition, FINRA has regulatory authority over certain life settlement transactions, as well as all of its member firms.

In my attempt to “sort this out” I began with FINRA. As it relates to variable life insurance contracts, FINRA’s position is clear–all sales of variable contracts are regulated by FINRA and this extends to the settlement of these policies on the secondary market. If a variable policy is to be settled, it must be done through a licensed registered representative and a member firm. All sales proceeds must flow through the broker- dealer. In many ways this is the easiest part to understand. If your broker-dealer allows you to participate in life settlements (that’s a big if by the way, and we’ll get to that later) and you have a variable contract to settle, that transaction must be facilitated through your broker-dealer and you will be compensated through your broker-dealer as well.

FINRA’s major concern seems to be suitability. FINRA cautions investors to look at these deals carefully and fully inform themselves as to all aspects of the transaction. In terms of suitability they have 4 major areas of concern:

–That by settling an existing life insurance policy an insured is selling an important asset in their overall financial portfolio.

–The privacy issues surrounding the client’s information being disseminated by life settlement brokers and/or providers.

–The tax implications of the life settlement transaction.

–The effect of the transaction on the insured’s overall life insurance capacity.

These issues spill over into FINRA’s position on non-variable contracts as well. Although FINRA claims no jurisdiction over non-variable life insurance contract settlements, it mandates member firms to provide oversight of their representatives in all transactions whether they involve a variable contract or not. The goal is for the consumer to receive the same level of attention to suitability concerns in all situations when dealing with a representative of a FINRA member firm.

In addition, if you are settling a non-variable life insurance contract and are advising the client to invest the proceeds into a securities product–this would again fall under FINRA’s jurisdiction concerning broker-dealers and registered representatives. What is very clear is that if your broker-dealer allows life settlement transactions, variable life settlements must be transacted through that broker-dealer and facilitated by one of their approved settlement brokers and/or providers. In a non-variable contract settlement, you must report any transaction on your OBA (Outside Business Activities report).

As far as the life insurance companies and broker-dealers themselves are concerned, there is a wide array of approaches to the life settlement business and allowing their agents to participate. They run the gamut from:

–Some companies have a list of approved life settlement brokers and providers and are allowing their agents to place life settlement business and receive compensation through their internal channels.

–Some are taking a “hands off” approach and are allowing, but not “sponsoring,” the business. Compensation can be received as an outside business activity, assuming the policy being settled is not a variable life contract.

–Others are allowing their agents to offer advice to clients who inquire about these transactions, but do not allow their agents to participate in or derive compensation from the actual life settlement.

–Finally, some companies have a strict prohibition against their agents having any role in the process at all.

As for the future, it is clear that life insurance companies and broker-dealers will be taking a more active role in the life settlement business. As the secondary market grows, advisors will have a fiduciary responsibility to inform their clients of all of their potential “exit strategies” from their life insurance policies. FINRA Rule 2320 requires that “…a member shall use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.”

This could be applied to the life settlement transaction as follows: If the client is considering surrendering a policy for its cash surrender value and a more favorable price exists on the secondary market, it would seem that Rule 2320 would mandate that the settlement market be at least considered by the agent or broker as part of their due diligence process. This should lead to more focus upon training and supervision of agents and brokers by their primary insurance carriers and broker-dealers.

All of this should have a positive impact on the life settlement business and the clients considering settling their life insurance policies, because more informed, better trained and more closely supervised agents and brokers can do a better job advising their clients.

All of this seems to be leading to an evolutionary process among the large insurance companies and broker-dealers. As they become more informed about and comfortable with the traditional life settlement transaction, there has been a trend towards allowing more career agents and registered representatives to participate. Again, the key is suitability. In situations where it can be clearly demonstrated that the life settlement makes absolute sense for the client, many companies are now allowing their agents to participate in the life settlement where 12 months ago they would not have.

In addition, FINRA also allows for settlements of variable life contracts where it makes sense for the client and the client is fully informed of all aspects of the transaction. These factors show that the life settlement market is vibrant, growing, and for the right client can be a solid exit strategy if they no longer want, need or can afford their life insurance policy.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.