In nearly a decade of daily dealings with insurance and financial professionals, I have talked to many life agents who say their carriers will not allow them to offer life settlements. Most of these agents understand that the companies are against the settlement option because a settlement keeps a policy in force that would otherwise lapse. That means at some point the death benefit will have to be paid, thus increasing the percentage of death claims the carrier has to pay.
In reality, while life settlements may keep policies in force, they also increase the long-term life insurance options insureds and owners have, so the value of life insurance itself is actually improved, thus making it a more likely and more attractive purchase for consumers. The consumer wins whenever a product they purchase has greater inherent value with more options for ongoing financial and estate planning. In the long run, that benefits both producers and the companies they serve.
For instance, agents may have a policyholder who wants life insurance but may not be able or willing to pay skyrocketing premiums on an underperforming policy. Or, a policyholder may understand that a different product -- perhaps a newer-model life policy -- may be in order. Under such circumstances, a life settlement could provide the consumer with more money than a cash surrender to buy a new, more efficient policy or some other product.
Is a life producer acting in a client's best interest if they think the client would be a good candidate for a settlement, yet fail to disclose their knowledge of settlements because their carrier prohibits it? In the laws of most regulated states, the agent has a fiduciary responsibility to their client regarding life settlements. Further, the new NAIFA-endorsed errors and omissions policy offers coverage for participating NAIFA members who are involved in life settlements with their clients.
While many home offices dictate that agents will do no life settlement business, others are investing in the life settlement market, sometimes through the back door. Note the quiet entry of a few life insurance companies, including Gen Re (a Berkshire Hathaway company) and CNA, into the life settlement market. That, in and of itself, is a strong statement that even insurers acknowledge the value of this new asset class.
By what authority?
Whatever life insurance carriers have to say about agents' involvement in life settlement transactions, an important fact should be noted: Most life producers are not employees of the carriers. Rather, they are independent contractors, bound by many laws and resulting regulations -- certainly ethics -- to have primary allegiance to the consumers they serve.
So, these life companies may not legally be allowed to tell agents categorically that they cannot transact settlements, although they can certainly try to make it hard on them. Some life companies have issued memos telling their producers how evil settlements are, but this propaganda is not really working because agents are smart and can do the math. They understand that it is better for a settlement client to receive three, four, or five times cash surrender value than lapsing a policy for 20 percent of the amount they receive in a settlement.
As the first wave of baby boomers enters their retirement years, it is estimated that there will be an additional $100 billion available in life insurance coverage that qualifies for purchase in the life settlement marketplace. With life insurance currently held by people over 65 already estimated to be in excess of $500 billion, it is clear that this is a market with vast potential.
Add to this the potential and probable elimination of the federal estate tax, and you can see why the application of life settlements as a tool for life insurance policy disposition is becoming more and more attractive.
Agents caught in the middle
Yes, some life carriers may continue to disparage life settlements for their own reasons, but eventually, all brokers will come around on life settlements. If nothing else, simple economics dictate that consumers want this option and the professionals who serve and advise them directly are bound to at least reveal life settlements as an alternative. And many of them see it as a fine one. They tell me that in phone calls every day.
Steven H. Applegate is vice president of policy acquisitions for Habersham Funding LLC, a life settlement provider. He can be reached at applegate@habershamfunding.com.
