Life Settlements: Letters of Competency

What You Need to Know

Physicians often provide the letters.
The company buying a policy will probably want certification.
Certification may also help protect you.

A letter of competency regarding the insured and the policy-owner seller, if not the owner is not the insured, is a standard requirement for a life settlement transaction, and for many other types of financial transactions.

Some advisors and their clients may be unfamiliar with letters of competency.

Here’s a look at how they work and why they are used.

1. What is a letter of competency?

While specific forms vary, it is a statement from a physician certifying that a person (usually, but not always, a senior) is capable of making their own rational and informed decisions about their health care, finances and estate.

Typically, it is requested from a primary care physician who has been seeing the client for some time.

2. When are letters of competency used?

Although the legal and medical definitions of competency might not be identical, such a letter can be an important piece of evidence in any proceeding in which the competency of an individual is an issue.

Most commonly, this would be in a will contest or in a proceeding to have a conservatorship established.

A letter of competency can be most useful in a hostile family situation where decisions are being made that can disinherit or severely diminish the inheritance of a family member.

3. Who typically asks for a letter of competency?

A letter may be obtained on the client’s own request or on the recommendation of the client’s estate planning lawyer, as lack of competency is a common assertion in contested estates.

In the context of life settlements, in addition to protecting the investors, a letter of competency can assure the client trying to sell the policy that the client has the mental fitness to make this important decision.

Finally, other participants in the transaction, like you and the client’s other advisors, can also benefit from having a letter of competency as part of the closing package.

4. What kinds of problems might come up?

Like the writing of a will or the creation of a trust, a life settlement is a significant estate planning event, which, additionally, involves a senior.

Similarly, a life settlement concerns a life insurance policy that may represent a substantial portion of an insured’s estate.

Like a contested estate, theoretically, the life settlement transaction could be challenged based on the competency of the insured/seller.

As a result, life settlement investors require a letter of competency on a form they provide, which will offer them some protection should the validity of the sale of the policy be challenged based on the capacity of the insured/seller.

Peace of Mind

Knowing about how letters of competency work and about the potential pitfalls is important for a financial professional helping a client sell a policy, but problems in this area are, thankfully, rare.

Life settlements are highly regulated transactions in the vast majority of states.

A letter of competency is just another way to assure all parties involved in the transaction that the insured/seller has the wherewithal to make rational financial decisions.

Robin S. Weinberger, CLU, ChFC, CLTC, is the director of national accounts for Life Insurance Settlements Inc. She has been a general agent and director of national accounts for Connecticut Mutual and vice president of marketing for Sun Life of Canada. She can be reached at [email protected] or (617) 451-3343.

Peter N. Katz, JD, CLU, ChFC, RICP, is a life settlement broker and co-director of national accounts with Life Insurance Settlements. He is also a consultant specializing in life insurance advanced sales illustrations, and he has served as an advanced markets attorney and in product development. He can be reached at [email protected] or (860) 937-2936.

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