Protecting Client Information in Life Settlements

Counseling your client to make a fully informed decision about the initial purchase of a life insurance policy includes educating and reassuring them about all of the unique options a life insurance policy holds. In addition to the more traditional options inherent in a life policy, a proper education should include discussing life settlements as an optional future exit strategy. All parts of a life settlement should be discussed, including one concern many have: The protection of the seller and insured’s private and confidential information (PCI), such as medical and financial records.

When you first begin considering life insurance policies, you and your client will rightfully think about the future value of the policy to the consumer – of course, the death benefit amount, the cash surrender value, and other forfeiture options. The values inherent in a policy have formed the core of the life insurance industry’s sales strategies for nearly 100 years. This inherent value is derived from liquidity; that is, the client’s ability to turn the policy into cash if and when needed.

There are two built-in features of a life policy that allow the client to harvest a better return than the policy’s pre-determined built-in cash value. One is the terminal illness advance death benefit option. Another built-in feature is the right to assign, or sell, the policy to another party for cash or other consideration. This second quality of a life insurance policy is often unknown or misunderstood by clients but has been used for more than 200 years and has recently become more popular as an exit strategy for unwanted policies. So, the responsibility falls to you as the agent to properly educate your client about all these liquidity options as early as the initial policy sale. In fact, educating the consumer about this early in the sales process correlates to improved sales.

Your client should be fully aware of the available possibilities for realizing the value of the policy they are buying. In turn, you must be educated enough about all these options to intelligently discuss the positives and negatives of each, to dispel any false notions held by the client or other involved professionals (such as a financial advisor, accountant, or attorney), and ultimately work with those other professionals and the client to determine the best course of action.

In some cases, one of the most appealing options available to realize the value of a life insurance policy prior to its maturity can be a life settlement (including both life and viatical settlements). And again, when assigning a policy in the secondary market for life insurance, there is a transfer of PCI inherent in the transaction.

A brief history

In the early years of the settlement industry, PCI was only shared between the seller’s broker or agent and the purchasing provider. Generally, the provider did not pass the PCI on to the investor who would eventually own the policy. This created several issues. For instance, without PCI, the investor could not accurately value the policy or even verify the existence of the policy. A few bad actors took advantage of the industry practice to commit fraud by selling investors non-existent policies or the same policy to several different investors.

As the legitimate industry advocated for change to stop these fraudulent practices by a few, the reaction was swift and extreme; these measures likely saved the settlement industry from other bad players but created new issues which needed to be addressed. Legislatures and departments of insurance across the country began to regulate the transfer of PCI, thereby creating more transparency for investors. The consequence was that many parties involved in settlement transactions and subsequent sales must treat PCI with the care that it deserves.

While there have been no reported breaches of PCI linked to life settlements to date, PCI concerns related to settlements have caused many states to pass laws or adopt rules to better address this issue. For instance, nearly every state in which life settlements are regulated subjects all PCI collected during the transaction to other state and federal laws applicable to confidential medical information. Additionally, settlement laws explicitly limit the disclosure of PCI to certain parties and for certain reasons, many requiring specific consent of the seller and insured. Moreover, other states, including Texas, require that any entity that keeps track of the insured’s health status following the transaction must be licensed with the insurance department.