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.