A crisis is in the making. And if something isn’t done soon to circumvent it, then things are likely to turn out badly for producers.
That about sums up the situation for life insurance and financial service professionals on the question of transacting, or even recommending, a life settlement to senior clients who might benefit from one. For whichever course an advisor takes could result in a backlash — from affiliated life insurers, regulators or clients.
A problem that shouldn’t be
That producers should find themselves in 2015 between a rock and hard place on so important an issue — whether a senior client should sell their life insurance on the secondary market to a willing buyer — is deeply troubling. And not only because of lost sales opportunities.
Which, I might add, are potentially substantial. As I note in my feature of the April issue of National Underwriter Life & Health on life settlements, the market is, following a rough patch stemming the 2007-2009 downtown, on the rebound.
Growing by double digits — both in terms of the number and amounts paid for settlements — the space is riding favorable interest rates and a capital infusion from institutions that acquire the policies. Fueling demand, too, is greater savvy among the key players in approaching the transactions, and a desire among investors for more financial instruments that don’t correlate with equity market fluctuations.
Depending on the face’s amount, the commissions for brokers can be eye-popping: $100,000 and up. One producer I interviewed for my feature, Michael Weinberg, is expecting 6 times this amount for a life settlement he’s working on.
But set aside for the moment producer compensation. An unavoidable fact is that many seniors over age 65 who are in ill health and not willing or able to pay premiums on their life insurance should consider a life settlement.
Selling to an outside buyer will frequently yield more money for the client than surrendering the policy for its cash value. A settlement may also be superior to two other common options: allowing a policy to lapse; and using the cash value (assuming a permanent life policy) to buy a paid-up contract with a reduced face amount.
Unfortunately, many advisors are prevented from transacting or recommending a life settlement to clients because of the opposition (for widely discredited reasons) of life insurers with whom they’re affiliated. Those who defy company policy risk losing, at the least, carrier appointments authorizing them to sell product.
If it were just a question of lost business, carrier restrictions might not so be bad. Agents and brokers could simply, as many now believe, ignore all discussion of life settlements and focus on other aspects of insurance and financial planning.
That position is looking increasingly untenable, particularly for those advisors bound by regulation and standards-setting bodies to put their clients’ first. Among them: registered investment advisors, dual RIAs/registered reps and certified financial planners. These financial professionals are potentially violating a fiduciary standard of care under which they operate when instructed by an insurer to stay clear of life settlements.
Agents and brokers who thought they were not subject to a fiduciary rule may be in for a rude awakening. With the SEC and the DOL now moving toward extending some variation of the rule to all who deliver, respectively, investment and retirement planning advice (and given also the SEC’s and FINRA’s stated positions that life settlements are securities), it’s only a matter of time before the issue comes to a head.
“Producers are already in the uncomfortable position of having to weigh their clients’ needs against their companies’ policies,” says Peter Katz, a life settlement broker and co-director of national accounts at Life Insurance Settlements Inc. “If a fiduciary standard is implemented for brokers, then they may have a big problem.”
And not just with regulators. Outraged seniors who learn only after surrendering or lapsing their policies that they could have done better by selling the products might seek recompense in the courts — exposing their advisors to potentially high legal damages.
Clearly, action is needed before the issue reaches crisis levels. To wit: Insurers need to drop their unjustified resistance to life settlements. The sooner they do, the better it will be for everyone.