A Financial Advisor’s Fiduciary Duty and Life Settlements

2. Life settlements aren’t right for everyone.

A life settlement can unlock wealth in the right situation, but it’s not a cure-all financial strategy. For one, not every life insurance policy is marketable. Investors prefer permanent or convertible term policies valued at $50,000 or more, and insureds who are at least 65 years of age. Younger policyholders who are terminally or chronically ill may, however, qualify for a viatical settlement instead.

Secondly, the life settlement does transfer the policy’s death benefit to someone else. For that reason, the client who feels strongly about using the death benefit as an inheritance or gift to surviving loved ones is not a candidate for a life settlement.

And finally, a life settlement may produce unwanted financial implications in some situations. A portion of the proceeds will likely be taxable, for example. As well, the value in that life insurance may be protected from creditors before the sale — but that protection ends when the client receives the cash proceeds once the transaction closes. The influx of cash may also affect the client’s eligibility for needs-based programs like Medicaid. For those reasons, your client should invite legal and tax advisors to the conversation before any decisions about life settlements are made.

3. Fiduciary duty of brokers vs. providers.

The main players in a life settlement transaction are the selling policyholder and the buyer, also known as the life settlement provider. Providers can purchase life insurance directly, but they also work through life settlement brokers.

The distinction between a broker, like Suncrest Benefits, and provider is important to you and to your client. Here’s why. The broker has fiduciary duty to the client, but the provider does not. The provider is buying the insurance on behalf of an investor and is bound to that investor to pay the lowest price possible. The broker’s role, however, is to capture the highest selling price. He or she delivers on that goal by setting up a bidding auction among potential buyers. The competitive nature of the auction naturally puts upward pressure on that selling price. A broker might manage three rounds of bidding, for example, negotiating along the way to push those offers higher.

Sellers do pay brokers a commission from the proceeds. Even so, the brokered sale often produces a higher net payout than a direct sale because they can generate a higher selling price.

4. Life settlements are a viable financial strategy.

The life settlement is a legal, regulated transaction that can provide much-needed cash flow for seniors. It’s a viable financial strategy and, in some situations, the most lucrative approach for someone who no longer needs or wants their life insurance. The financial advisor who understands life settlements and can present them when appropriate is prepared to fulfill the fiduciary standard and also help clients reach their financial goals. On the other hand, the advisor who avoids the topic, even as a client considers surrendering life insurance, may be in direct violation of that fiduciary duty.

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Lucas Siegel is the founder and chief executive officer of Harbor Life Settlements, a life settlement company, and Suncrest Benefits, a life settlement broker.