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Life Health > Life Insurance

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

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Oftentimes, a client accumulates multiple life insurance policies as financial and estate planning needs change. But when a client’s needs for maintaining a policy ceases, a life settlement–selling one’s policy to third party investors for less than the contract’s face value but more than the cash-surrender–may be appropriate.

Accordingly, financial advisors should understand the regulatory requirements applicable to representing a client for whom a life settlement may be suitable and the due diligence procedures that should be undertaken in that representation.

Regulatory Compliance

A financial advisor seeking to help a client evaluate a life settlement must take care to avoid being characterized as a life settlement broker (unless properly licensed to act as a life settlement broker) even if the client has enlisted the services of an “official” licensed life settlement broker. Generally, a life settlement broker is a person who negotiates a life settlement contract on behalf of a policy owner in exchange for a fee.

Life settlement brokers owe a statutorily imposed fiduciary duty to policy owner clients. However, a few states define a life settlement broker more broadly to include persons who gather information for a life settlement or who introduce policy owners to life settlement providers. Thus, advisors need to understand in the states in which their clients reside what activity can trigger application of the life settlement broker regulatory requirements, including licensing, approval of life settlement transaction related forms and financial security requirements enforced by state insurance departments.

Due Diligence Best Practices

If an advisor acts as a life settlement broker or works with one on behalf of a client, the advisor should ensure that good due diligence procedures are employed to protect the client and determine whether a life settlement is appropriate and, if so, whether a transaction with a particular provider is in the client’s best interest.

The decision to sell a life insurance policy on the secondary market should entail an examination of the client’s continued need for the policy or the continued need for the death benefit by the current beneficiary or beneficiaries of the policy. A client may no longer want or need a policy due to: an inability to pay the premiums; divorce; predeceasing of the client’s spouse or prior beneficiary of the policy; or poor financial performance of the policy.

If a life settlement is appropriate, the life settlement broker representing the client should seek to obtain multiple offers for the purchase of the policy. While sometimes multiple brokers may be engaged to solicit purchase offers from life settlement providers, having too many brokers working for the same client can create confusion to providers reviewing the case and inter-life settlement broker competition.

Generally, using a single reputable and licensed broker will suffice. Purchase offers should be sought only from reputable and licensed providers. Regulatory licensing status and good standing with state insurance departments can be verified by checking the websites and/or speaking with the life settlement personnel of the state insurance departments.

The litigation history of a life settlement provider should also be queried to confirm that it has not had problems with consumers, brokers or investors to which the provider sells policies that it buys. While there is no hard-and-fast rule about the number of purchase offers a broker should obtain, because the broker is a fiduciary of the client, more than a single offer should be sought to assess the policy’s market value.

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].


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