First National Life Settlements, a Jenkintown, Penn.-based company, takes 10 life settlement myths to task.
- The client must be terminally ill. A life settlement differs from a viatical settlement in that the original policy holder may have a life expectancy longer than two years.
- It’s a security. In a life settlement, the whole policy is sold at once, without “raising capital or fractionalizing policies into shares for sale as an investment to individual investors.”
- The client must be desperate for cash. According to the company, the typical life settlement client is a 76-year old high-net-worth person with an underperforming policy.
- The industry is not regulated. Brokers must be licensed in 33 states; in the remaining states, the insurance commission monitors these transactions regularly. “The industry’s governing body — the Viatical and Life Settlement Association of America (VLSAA) — works closely with the National Association of Insurance Commissioners (NAIC). The NAIC has written a model act to encourage states to adopt uniform standards for regulating the life-settlement industry.” However, California currently does not regulate life-settlement transactions.
- Life insurance should never be sold. “The reality is that if you have ever had a policy surrender or lapse you are already very active in the liquidation of life insurance policies,” says First National. If a policy is surrendered it is sold back to the carrier at a predetermined price. If it lapses, it is sold at a zero price. “A life settlement simply allows for the fair market value of the policy to be recovered.”
- The whole process is cumbersome and inconvenient. All underwriting utilizes existing medical records, and the process normally takes six weeks to eight weeks to secure offers, according to the company.
- Any senior with insurance will qualify. The life expectancy of the insured, premium amounts, surrender amounts, and loan amounts are all considered when determining if a life settlement is appropriate.
- The return is not worth the effort. While average returns vary, the company says returns can be anywhere from 12 percent to 33 percent of the policy’s face value.
- It’s twisting or churning and it’s illegal. Twisting and churning involve the use of misleading practices to induce a client to lapse, surrender, or terminate a financial product to effect a replacement for the purpose of generating a commission, the company writes. On the other hand, “life settlement candidates are identified through routine periodic insurance reviews or surrender or lapse notices, an automatic premium loan, or a past due premium notice; the life-settlement option is no more inappropriate than recommending a surrender, lapse, or 1035 exchange as an exit strategy for any life policy already in jeopardy.”
- The liability is too great. Every financial professional should be mindful of the spirit of the NASD suitability rule (Conduct Rule 2310) in his or her approach to life settlement transactions, even though the sale of a life insurance policy is not a securities transaction. The suitability rule provides that a member shall have reasonable grounds for believing that the recommended transaction is suitable for the customer based on the client’s entire financial and personal profile.
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