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.
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.