Here's a dilemma: Imagine knowing exactly what your client can do to increase their profits from the sale of their life insurance policy.
Now, imagine not being able to say anything about it. That's exactly the position many producers find themselves in, thanks to the disconnect between what insurers allow and an agent's regulatory obligation to their clients.
States are rapidly adopting legislation to protect consumers when it comes to the life settlement market, with more than 80 percent of the nation regulating the transactions in some form or another. It's not the market itself that is at issue, but rather the practice of stranger-originated life insurance (STOLI) -- buying insurance with the intent to resell it on the life settlement market, which is prohibited.
These policies were being sold the first time around with the express intent of reselling them for a quick turnaround, and in some cases, premiums were being fronted for the policyholder. As a result, most life insurance policies now have a period during which the policy cannot be resold -- typically anywhere from two to five years. This is one of the reasons why insurers and life settlement providers parted ways from the outset. It's also the reason some states are adopting laws that require agents to disclose the life settlement option to their customers.
The STOLI practice caused an outcry from consumers and has prompted insurance regulators to propose, push for, and adopt laws that now affect life settlements and the way the insurance industry should handle them. As of press time, 38 states had regulatory legislation pertaining to life settlements on the books, with three states (Maine, Oregon, and Washington) specifically requiring that insurers and agents inform older policyholders of all their options -- life settlements included -- rather than presenting an either/or scenario of surrender or lapse.
But here's the catch: Many carriers do not want agents discussing settlements with policyholders. Many have gone so far as to ban the mere mention of life settlements to policyholders, and a number of insurers include contract stipulations that expressly prohibit agents from entering into such discussions.
"[Agents are] stuck between a rock and a hard place," said Doug Head of the Life Insurance Settlement Association (LISA), "the rock being the immovable insurance companies who discourage any settlement activity, and the hard place being consumers who want to know about this option."
Consider disclosure regardless
Luckily for agents, most states do not require producers to disclose the life settlements option to their customers -- but the sensible thing for any agent is to adopt a full-disclosure practice, according to Francine Semaya, insurance regulatory expert and partner at law firm Nelson Levine de Luca & Horst in New York.
"If there is another option out there, it needs to be disclosed," Semaya said. "And the consumer needs to be educated as to what's best for him or her."
While agents aren't typically subject to the same fiduciary responsibilities as investment advisors, they do have a certain level of responsibility to their clients. Agents who want to retain the majority of their clients find the choice is an easy one.
And as more states pass regulations that require full disclosure, experts agree that more insurers will relax the rules for agents, allowing them to offer all the options.
In general, there is more pressure on the insurance industry to be more forthcoming with regard to the life settlement industry and the options it presents. Yet there remain some insurance companies that still refuse to allow their agents to discuss life settlements with their clients. The reasons seem less clear than they once did, since legislation now brings the life settlement market under regulatory control. In New York, for instance, life settlement providers must be licensed with the state insurance department; other states have adopted similar measures.
The regulations define consumer rights and privacy and include enough anti-STOLI language to discourage illegal practices. There's also an education piece that goes along with much of the legislation, which makes sense if life insurance producers will now be expected to inform clients about their options in the life settlement market. After all, producers need to have a working knowledge of all the moving parts involved in a life settlement arrangement if they're recommending it as an option.
Moreover, agents have to know where to draw the line.
"They can't be competing against themselves in the life insurance market," said Semaya. "If they're life insurance agents, they have obligations and responsibilities, both regulatory and to those insurers they represent. They can't undermine that."
Beware the risks
Scott Witt, of Witt Actuarial Services in Wisconsin, said that common sense suggests that consumers should be made aware of all opportunities, especially if the customer has already decided that the best option would be to give up the policy.
However, he cautioned that taking on a fiduciary responsibility could also bring on all the risks normally not associated with insurance agents.
All experts agree that the burden that full disclosure brings on an agent could create more work and more risk than these laws intended. At the moment, agents in the three states that require life settlement disclosure are required to do no more than inform customers of the option. All agree that it's inappropriate to hide the option for whatever reason.
The bottom line for agents is that the larger risk to the agent comes from the consumer side. If companies are unwilling to inform customers of the life settlement option, agents need to take a more proactive stance. With litigation serving as a ticking time bomb, producers need to weigh what's more important -- serving their contractual arrangement with the insurer, or giving customers full disclosure.
And disclosure is becoming much more difficult to avoid. With so many states adopting legislation, agents can no longer claim ignorance on the issue. Putting the concern of the insurance company's directives over that of the consumer is dangerous ground -- and not just for the agent, said Witt. "If I were a company issuing that directive, that would make me nervous."
Lori Widmer is a freelance writer and editor who specializes in risk management, insurance, and financial topics. She can be reached at email@example.com.