At a recent conference, we were stunned when we asked the agents, advisors and registered reps in the audience if they would recommend the life settlement option to a client. A number of participants said they would like to do so — and many indicated they had actually seen cases where their clients would have truly benefitted from selling an unwanted, unneeded or unaffordable life insurance policy on the secondary market — but couldn’t because their insurance company or broker-dealer did not allow participation in the life settlement market.
This has been an ongoing issue for years. Independent and captive agents or representatives of large carriers or broker-dealers operate at the behest of their employers or employee contracts, some of which ban participation or even discussion of the life settlement option to their clients. We are of course not advocating that agents or reps violate contract or employment law; we are simply trying to get to the core of why the carriers and B-Ds won’t allow such discussion or disclosure.
Aside from “protocol won’t allow for it,” carriers’ concerns range from the impact of lower lapse rates on profitability to potential loss of tax-free buildup of cash value within the policy to suitability concerns and due diligence issues. B-Ds cite the risks associated with increased compliance burdens and FINRA standards as reasons for not allowing participation.
Understandable, if this were 2006.
Some years back a large carrier cited “potential for abuse” and an “unsettled tax and regulatory climate” as reasons their agents are “strictly prohibited” from participating in the market — and we would be willing to bet similar language exists in other companies’ manuals, too. Our response: rest assured. The market is approaching full regulation around the U.S., with 42 states and Puerto Rico containing some form of comprehensive life settlement regulation. As for the potential for abuse, there have been only three closed consumer complaints nationwide involving life or viatical settlements since 2011, according to the National Association of Insurance Commissioner’s Consumer Information Source. This pales in comparison to the more than 8,000 complaints against insurance carriers for delays in paying claims, and that’s just in 2014, alone!
As mentioned in a previous LifeHealthPro article, the industry should closely follow an ongoing case in California, Larry Grill, et al. v. Lincoln National Life Insurance Company, where a carrier is facing a lawsuit for failure to inform a policyholder of the life settlement option, and instead had the plaintiffs surrender a large portion of the policy back to the carrier, likely resulting in the loss of millions of dollars had they qualified for a life settlement. Registered reps should be wary of the outcome of this case. It is worth asking your employer whether you would be accountable for failing to disclose other options that may prove beneficial to your clients.
There’s a big difference between “can’t” and “won’t.” The latter is proving detrimental to life insurance policyholders around the nation by depriving them of meaningful opportunities to utilize their own financial assets in a manner consistent with their personal needs and best interests because insurance carriers won’t take time to review the facts and become educated on compliance-related issues and the market. All of this means, ultimately, that they won’t help consumers as well as they could or should. Simply allowing agents and registered reps to mention a life settlement as an option would be an improvement.