What You Need to Know
- The authors contend that an insurer effort to encourage a customer to surrender a policy is a proxy for a life settlement.
- Some states have concluded that those efforts promote what amount to unlicensed life settlements, the authors say.
- The authors say the primary concern always has to be whether the life insurance is still needed.
Who would have thought the day would come that insurance companies are marketing policy surrenders instead of policy acquisitions, especially after years of disparaging life settlements!
For more than two decades, many life insurance carriers and their industry organizations have fought tooth and nail to impede the growth of life settlements. Certain companies have even gone so far as to prohibit their agents from pursuing a life settlement on behalf of their clients.
Yet, recently, some of the country’s largest life insurance companies have been offering selected policy owners enhanced cash surrender values, mimicking the benefits of a life settlement, in an effort to encourage them to surrender their policies.
As these offers are a proxy for a life settlement, some states have concluded that they are illegal under their insurance regulations either as an unlicensed life settlement, as a violation of Standard Nonforfeiture Laws or possibly as discriminatory by treating some policyholders better than others.
What Your Peers Are Reading
Through these offers, insurers have validated the founding principle upon which the life settlement industry is based: that a life insurance policy can be worth much more than its cash surrender value. Why would insurers make and package these offers with attractive marketing materials? It is not altruism. Insurers are trying to minimize their losses on policies that were priced or underwritten too aggressively. Getting these policies off the books, even if it costs the issuer some extra money now, is likely to save them money in the long run compared to the policy being kept in force until death.
Producers, quite naturally, are being asked to advise their clients about these offers. It must be kept in mind that insurers believe these policies are too good a deal for the consumer. They are priced too low and are too unprofitable and are undesirable to keep on the books – hence the additional incentive to surrender the policy.