Life Settlements Can Benefit the Life Insurance Industry

The life settlement industry has grown in recent years, giving financial professionals an avenue to additional business while they make new clients and reconnect with old ones.

But there's still plenty of room for more growth and opportunity. Many insurance agents and brokers, broker-dealers, and insurance carriers already have entered the secondary market for life insurance. They use life settlements as a way to further fulfill fiduciary responsibility to clients, by providing another financial planning option to seniors who are dealing with unnecessary life insurance policies. Other professionals may be hesitant to get involved with the transactions, however, because of a lack of knowledge or the belief that life settlements damage the life insurance industry. Many financial professionals may not know that the life settlement and life insurance industries have much in common and are more aligned in goals than what is typically published. By working together, we can foster mutual success and benefit for clients.

The life settlement and life insurance industries share common ground and goals in key areas, such as exit strategies for clients who purchase important financial products, marketability of life insurance, client satisfaction, fiduciary responsibility to clients, and prevention of stranger-originated life insurance.

Life Settlements -- An Overview

A life settlement is the sale of an existing life insurance policy that is no longer needed into the secondary market. These benefit eligible clients by providing options for seniors whose life insurance policies no longer fit their current needs. Life settlements work by enabling seniors to relinquish premium responsibilities associated with keeping an unnecessary or underperforming policy in force.

Life settlement transactions result in the policyowner handing over all policy rights in return for an immediate cash payment that is often much higher than the policy's cash surrender value. Transacted policies are then taken over by a third-party institutional investor who continues to make all premium payments and becomes the policy's sole owner. Upon the insured's death, the investor collects the death benefits associated with the policy.

Life settlements can provide seniors with additional financial-planning options, but they are not a good option for everyone. Financial professionals should conduct a full analysis of each client's financial situation, including evaluating needs and goals to determine if the current insurance program meets those needs. If any life insurance is deemed to be unnecessary or underperforming, then a life settlement is an appropriate course of action.

Life Settlements and Life Insurance -- A Common Ground

The life insurance and life settlement industries are connected in many ways. In fact, the life settlement industry depends on the success of the life insurance industry to continue to exist as a viable option for senior clients. Without existing life insurance policies, there would be no need for life settlements, as life settlement transactions can be completed only after a policy has been purchased from a life insurance company. Conversely, the availability of a secondary market for life insurance via the life settlements industry makes life insurance more marketable, as clients are more inclined to purchase policies if they know they have options should the policy fail to meet their needs in the future. This is true for any financial product. Think about the difficulty in selling products such as stocks, annuities, or mutual funds if clients did not have options for recouping their investments. Life settlements have provided a valuable exit strategy for billions of dollars in face value of underperforming life insurance policies, resulting in satisfied clients who have more choices when dealing with financial planning needs.

Many life insurance policies sold during the past decade were originally illustrated to clients using rates of return and premium assumptions that have not come to fruition. These clients have instead experienced sub-par returns and escalating premium payments, causing them to be extremely dissatisfied with life insurance policies, agents, and insurance carriers. Clients who were informed of the life settlement marketplace and were able to receive a market value for their policy (higher than cash surrender value) were naturally more satisfied and more likely to maintain relationships with agents to purchase new, more appropriate life insurance coverage.

The availability of the life settlement marketplace also has supported sales in the life insurance industry by bringing more clients to the market who would not have purchased insurance without a viable exit option. This is because many seniors who are interested in life settlements continue to need life insurance coverage after the life settlement transaction is complete, and therefore intend to purchase more efficient coverage with the money from the sale of the policy. These seniors want and need appropriate life insurance coverage and are still good candidates for purchasing life insurance, even though their existing insurance program did not work out effectively for them. The fact that there is another option for seniors in this situation has helped foster customer satisfaction, while increasing business opportunities for brokers and agents.

The needs of clients and the inherent fiduciary responsibility financial professionals have to such clients are paramount. Providing advice to clients who are considering a life insurance purchase is extremely valuable in the same way providing advice about the life settlement marketplace is important for those clients who have insurance policies that are no longer meeting their needs.

A Common Goal -- Regulations

In addition to the common business and client benefits life settlements and life insurance share, both have a vested interest in curbing stranger life-originated life insurance, otherwise known as STOLI. Such transactions are purposely initiated to benefit someone with no insurable interest in the life of the insured and violate long-standing insurable interest doctrine. These STOLI transactions have been met with disdain from those working with life insurance and life settlements.

Both carriers and those in the life settlement industry are concerned with insurable interest and how it relates to clients' purchases, especially since the sale of a policy into the secondary market results in the life settlement company owning the asset once a transaction is complete. When institutional investors acquire life insurance policies, they invest significant amounts of capital to pay the client, including acquisition costs, ongoing premium payments, and other costs. Such investors are not interested in STOLI policies, because they carry significant risks of carrier rescission and regulatory attack. An investor potentially risks a substantial loss on his or her investment in these cases.

Just as carriers have taken steps in their underwriting and compliance processes to eliminate STOLI, the life settlement industry also has taken steps to eliminate these transactions. The insurance and the life settlement industries initiated due diligence and compliance procedures to screen out STOLI even before the problems of STOLI gained the attention of regulators and the press, thereby cutting off funding for such contracts by the mainstream settlement marketplace. Major life settlement providers also instituted review processes to evaluate premium financing arrangements used to finance policies and the insurable interest at the time the policy was originally purchased. These reviews helped steer the institutional investment capital away from risky policies and cut off a significant amount of funding in the marketplace.

STOLI cause problems for both industries. Because of this, those working with life insurance and life settlements have taken steps to prevent fraudulent transactions. Two model acts have been introduced, one by the National Association of Insurance Commissioners (NAIC) and one by the National Conference of Insurance Legislators (NCOIL), both aimed at preventing STOLI. The NCOIL Model Act has been more widely accepted by financial professionals and state regulators than the NAIC Model Act because it defines STOLI and takes effective steps to eliminate fraudulent transactions without cutting off consumers' rights and access to the settlement marketplace. Despite this, legislation was introduced in state legislatures based on both acts, with a number of states passing new laws. Financial professionals are still calling for laws to be enacted based on the NCOIL act. Regardless of which model is enacted in a given state, however, the increase in regulatory awareness has helped create a stronger industry and fewer opportunities for the fraudulent purchase of policies.

The life settlement industry is constantly growing and evolving, and with it, more opportunities are opening up. Many carriers already have entered the life settlement marketplace as both investors and advisors (via their producer distribution forces), reaping the benefits of offering clients a new financial option that often creates additional business opportunities and clientele. What's more, carriers who recognize life settlements can help fulfill fiduciary responsibilities to clients and reduce the risk that seniors would surrender policies or let them lapse because they were never informed of the life settlement transaction option.

Life settlements and life insurance have more in common than many financial professionals may be aware of, and gaining knowledge on the opportunities life settlement transactions can provide is the first step in successfully entering this growing marketplace. To learn more about the benefits of life settlements and recent regulatory changes, producers can tap into a number of professional resources, including the Life Insurance Settlement Association (www.thevoiceoftheindustry.com), the National Conference of Insurance Legislators (www.ncoil.org), and the Life Settlement Awareness Month (www.lifesettlementawarenessmonth.com) Web sites. These organizations provide updated information on trends affecting the industry and information for successfully getting involved with the secondary market for life insurance.

Larry Simon is director, chief executive officer, and president of Life Settlement Solutions, Inc. The company and its management represent one of the most experienced institutionally funded life settlement providers, having purchased life insurance policies in excess of $2 billion in aggregate face value to date.