A Financial Advisor's Guide to Evaluating a Life Settlement Transaction for a Client

Because brokers work frequently with certain providers, care should be taken to ensure the broker is not “too cozy” with providers to which the life settlement case is presented and that the broker is dealing with the providers at “arms’ length.” The client should have a written agreement with the broker specifying: (1) the brokerage services to be performed; (2) the amount and method of calculating the brokerage commission; and (3) to whom the commission will be paid from the gross settlement proceeds.

If a broker intends to share a portion of the commission with another broker or a life insurance agent (such as the agent who sold the policy when issued), the client should agree to this in writing. Life settlement transaction forms presented to the client for signature should be examined to confirm they have been approved by the applicable state insurance department if they are forms requiring approval prior to use by broker.

Most life settlement providers buy policies for, and transfer them to, an investor or entity established by an investor to hold investments in secondary market life insurance policies. Therefore, a client should understand who or what will become the policy’s owner.

Among the possibilities: an institutional investor, like a hedge fund or affiliate of an investment bank or a pension fund; a non-institutional investor, such as an investment vehicle established by a group of individual investors or by a sponsor that is selling interests, directly or indirectly, to individual investors. A client should further understand whether, and if so, the likelihood, that the life insurance policy may be subsequently resold and to what type of investor.

The tracking of the client’s life or health status and attendant privacy concerns should also be undertaken. Many providers perform tracking services for the investors to which they sell policies as a service to them. There are also independent tracking services firms, but most are not regulated by state insurance departments. So investigating the party that will perform the tracking is important.

The client should understand that he or she, or a designee, will be contacted periodically to check on the client’s health and that non-public, personal information, especially health or medical information, will be provided to not only life settlement providers to allow them to assess the value of the policy, but also to investors that may purchase the policy from a provider; and to subsequent investors that may acquire the policy in a “tertiary” market resale.

Summing Up

In conclusion, financial advisors whose clients are considering a life settlement must first avoid becoming engaged as a life settlement broker under the life settlement laws unless they are properly licensed to act as a life settlement broker. If an advisor is merely assisting a client and working with (but not acting as) the client’s broker, the advisor should be careful not to undertake a fiduciary relationship with the client in the life settlement transaction.

In performing life settlement brokerage services, the broker should due diligence the licensing and regulatory and litigation track record of life settlement providers that bid on the policy and the nature of the investors that may eventually become the owner of the policy, as well as the tracking servicer that may contact the client after the life settlement to monitor the client’s life status.

Brian T. Casey, Esq., is partner and co-chairman of the Corporate Insurance Practice Group
at Locke Lord Bissell & Liddell LLP, Atlanta, Ga. You may e-mail him at [email protected]. Dan Young, CLU, ChFC, CASL, is general counsel of Vida Capital, Inc., Austin, Tex. He may be reached at [email protected].