Washington, Oregon and Maine now have laws that a require life insurers to notify policy owners that the owners have alternatives to cashing out, accelerating or lapsing their life policies.

That development is being welcomed by settlement industry professionals, because one of the available options is life settlements.

But how might those new laws impact advisors who work on settlement cases?

The question is getting legs because some industry experts are predicting other states will enact similar laws. For instance, Timothy Pfeifer, president of Pfeifer Advisory, LLC, Libertyville, Ill., says that “disclosure of settlement options to policyholders will be broadly required” in the coming years.

The insurance industry is recognizing that settlements are here to stay and that the overall movement is towards more disclosure, he explains.

He notes that 3 or 4 insurers are doing their own settlement services on a per-case basis. “The companies have sent their agents directives that say something like this: ‘If your customer is considering a life settlement, let us know. We have internal operations for doing this.’”

All of this will fuel the expansion of state laws requiring disclosure of settlement options, Pfeifer concludes.

If that happens, it will be increasingly important for agents to become familiar with all settlement options and be ready to discuss them with clients, say experts.

Those options should include life settlements, say settlement experts.

James W. Maxson, an attorney with experience in settlements, is quick to point out that the new disclosure laws are specifically directed to life insurers. “There is no legal risk to the advisor under the disclosure sections of the laws.”

But when policyholders receive the disclosure notices from their insurers, some policyholders will likely contact their advisors to learn what their alternatives are, says Maxson, who is of counsel with Morris, Manning & Martin, LLP in Atlanta.

The advisor has the responsibility to discuss all available options, he says. And “under common law, they have the obligation to discuss the best possible option,” he adds.

In fact, says Maxson, “advisors always have the responsibility to provide all available options, and to recommend the best option.”

Richard L. Akins, a financial planner and investment advisor with LPL financial Services in Portland, Ore., adds, “We (advisors) are required ethically to give all information to the client and guidance based on our experience to help solve the client’s problem.”

In his own practice, when he encounters a client for whom a life settlement would be the best available option, he says he sends the client to an expert in the settlement business. “I don’t handle the transactions myself, but I do know about them and discuss them,” he explains.

Akins recalls one man in his 70s who had no dependents and no longer needed his life policy. “We discussed the advantages and disadvantages of all the options, including life settlements and reverse mortgages (which Akins also rarely handles), and then the client made the decision based on what he wanted to do.”

Akins predicts that similar scenarios will play out under the new Oregon law.

Ideally, the advisor who sold the policy and continues to work with the client would have discussed all the options long before, Akins says. But if the policy in question has been in force for several years, it is possible that the original agent will no longer be in the life insurance business or may no longer be alive, he says. “In that case, the customer would probably check around with two or three advisors in the community and pick one he or she likes to ask about what the options are.”

Hopefully, the new advisor will be familiar with all the options and will explain them, Akins says.

The advisor’s role is very important, he adds. It is unlikely that most policyholders could, upon reading their policy, understand the options available to them, he explains. “And if the contract is an older policy, it’s likely that the contract would not even mention benefits acceleration.” Nor do life policies mention life settlements.

The state laws regarding such disclosure by insurance companies are not identical, but none specifically spells out what the “available options” are, points out Maxson, the attorney.

“That means they do not say specifically that the policyholder should consider a life settlement. But they do say that, when certain triggers occur–such as, a policyholder submits a request to surrender the policy or accelerate its death benefit or when policy lapse is imminent–the insurer should notify the owner that alternatives may be available.” The laws also call for the state insurance commissioner or other state official to develop a consumer document on policy owner rights that, among other things, “may include general descriptions of common products.”

These laws are a “big step forward” from having no notification at all, Maxson says, especially since “most consumers don’t know there are alternatives to surrender, death benefit acceleration and lapsing.”

“I think it’s a good law,” says Akins, the financial planner, of the Oregon statute.

“It’s a good back door check for the client–a nudge to go out and check out all the available options before making any change….

“It’s also good for the agent, because if the client takes an action on a life policy but later learns of another option that would have been better, there will be a record that the client was notified, in advance, that other options may be available. That notice is a prompt to check around first.”

The laws even say that. For instance, the Washington law says: “life insurance is a critical part of a broader financial plan. There are many options available, and you have the right to shop around and seek advice from different financial advisers in order to find the option best suited to your needs.”

Pfeifer points out that, to date, there have been no lawsuits from customers who claim that the insurance company and agent did not tell them that the customer could get a better solution elsewhere.

But such litigation will come, he predicts. Absent prior notification, the insurance industry is looking at “a thriving litigation risk” involving what customers need to know to get maximum return on their transactions.

The new disclosure laws will help address this risk, Pfeifer says.

Note:

–The Washington disclosure provision appears in SB 5195 – 2009-10.

–The Oregon provision appears in SB 973, SECTION 22.

–The Maine provision appears in PL 2009, c. 376 but the Maine legislature is now considering amending it slightly under proposed bill, LD 1523.