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Life Health > Life Insurance > Life Settlements

Protecting Client Information in Life Settlements

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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.

It is undeniable that the protection of PCI has been recognized and addressed throughout the states that regulate the settlement industry. To ensure that your client explores all potential avenues of realizing the maximum return on the life policy that they buy from you, you should proactively share this information. Not only will you be fully educating your client, but you are helping dispel the false notion that disclosing PCI for a settlement carries a higher risk than doing so for other financial transactions.

Your role in protecting PCI

If your client is considering a life settlement, insist that he or she sell to a licensed provider. Out of the states that regulate settlement transactions, all but one (Michigan) requires brokers and providers to be licensed to settle a life insurance policy.

While licensure does not guarantee that a PCI breach will not occur, it does reduce the risk of your client’s PCI falling into the wrong hands. For instance, an entity that has become licensed is more likely to have an understanding of the law and the responsibility for protecting and properly handling your client’s PCI. Furthermore, the licensure process is rigorous and expensive; a licensed entity is likely to make more responsible decisions regarding PCI because that entity has an incentive to avoid failures that could result in loss of the valued license.

And, because of financial responsibility requirements associated with licensing, the licensed entity is more likely to have financial and insurance coverage to cover your client should an unfortunate PCI breach occur. Finally, it is illegal to conduct a life settlement using an unlicensed broker or provider, and is a felony, for instance, in Georgia.

Advocate for a safe process

Inform your client of the settlement license requirement and the reasons why licensure is important. Ask for a copy of the provider’s license for the state of the policy owner’s residence. Ask the provider questions about how it handles and protects your client’s PCI. Ask the provider if it will track the insured or if it outsources this function, which will require another transfer of PCI. Remember that using a licensed provider offers more protection for you and for your client, which is the primary goal of life insurance.

M. Bryan Freeman has worked in the secondary market for life insurance for 20 years and is the founder and president of Habersham Funding, LLC, a life settlement provider. Jonathan Jarrell is the company’s associate general counsel. He can be reached via 888-874-2402 or [email protected].


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