I never get tired of sharing this fact: a life insurance policy is an asset. If a senior is not going to keep their life insurance policy—for whatever reason—they have a protected property right to sell that policy. In many cases, they’ll receive significantly more than if they simply lapsed or surrendered their policy back to the issuing insurance company. Just like a house or a car, life insurance policies can be a hidden treasure that can result in the senior receiving as much as 10 times more than the policy’s cash surrender value. Many seniors use the proceeds they got from the sale of a policy to fund retirement or pay for long-term care needs.
Yet many seniors don’t take advantage of this opportunity. Why? Because they don’t know it exists or, too often, the financial professionals who advise them—CPAs, wealth managers, estate attorneys, etc.—don’t know about it, either. Secondly, even when they are aware, they don’t understand it.
As such, I’ve dedicated much of my career to promoting the life insurance secondary market and dispelling the myths surrounding this valuable asset class. Over the past 15 years, I’ve worked diligently to create a market that makes selling a life insurance policy one of the safest and secure financial services available to seniors today. Over the past decade, the life insurance secondary market – also known as life settlements – has promoted an unprecedented nationwide set of laws and regulations that protect seniors who sell their policies.
Read on, because these standards matter—perhaps more than anything—when it comes to creating financial options for seniors.
It’s generally accepted that seniors are particularly vulnerable to misguided financial advice. Every advisor I know has a horror story to share about a client who was scammed or swindled out of a significant portion of his or her hard-earned assets. In fact, The Stanford Center on Longevity and the Financial Industry Regulatory Authority’s Investor Education Foundation recently reported that seniors over 65 are 34% more likely to lose money on a financial scam than people in their 40s. The good news is that the situation isn’t going unnoticed. Private organizations such as AARP and The Investor Protection Trust, as well as federal and state government entities including the Consumer Financial Protection Bureau, are aggressively working to protect seniors and their nest eggs.
In addition, the Life Insurance Settlement Association (LISA) has led the way in introducing and implementing consumer protections designed to inform and protect seniors so they can easily and safely access the market value for an unwanted, unneeded or unaffordable life insurance policy.
From educating sellers to informing beneficiaries to ensuring policies are being sold to the best possible advantage of the policyholder, the following Top 7 standards provide confidence to seniors and financial professionals that exploring the sale of a policy can be the right choice.
Selling a policy is a highly transparent transaction.
Prior to the sale of a policy, the seller receives numerous consumer disclosures. In most states, this includes all offers, the gross vs. net amount of the offer, sales commissions, comparisons of sale price versus the policy surrender value and accelerated death benefit amount, names of purchasers, and more. They say sunlight is the best antiseptic.
When considering selling a policy, sellers are advised of alternatives to selling it.
Imagine this: you’re trading in your old car at a dealership, and the dealer tells you about all the ways to NOT sell your vehicle. Licensed buyers of life insurance policies are required (in the majority of states) to do essentially that for someone selling their policy: Life settlement companies are required to provide sellers with information about keeping their policies in force, including disclosing that an accelerated death benefit or policy loan might be a better option. In addition, in most states, settlement offers disclose the settlement amount as compared to any accelerated death benefit that might be available under the policy. It’s definitely a seller’s market.
Sellers also receive disclosures of certain risks when selling a policy.
While in most cases the financial benefits of selling a policy far outweigh surrendering it back to the insurance company, there are certain risks that must be disclosed, including tax consequences, a reduction in government benefits due to increased assets (usually a good problem to have!), or creditor debt reducing the net value of the transaction. As a financial professional, your guidance will be needed to assess each risk.
Consumers receive a state-approved informational brochure about selling their policy.
To ensure sellers understand exactly what they are agreeing to and the benefits they will receive, most state laws require that brokers and buyers provide sellers with a state-approved brochure that defines the transaction, explains how it works, and provides them with the contact information of the state insurance regulator. The best consumer is an informed consumer.
Sellers must be deemed competent to enter into a settlement contract.
No amount of clarity can protect a senior who lacks the cognitive ability to make an important financial decision. As a result, most states require that the seller’s personal physician provide a certificate of mental competence prior to a sale—a protection that is unprecedented and underscores the emphasis on consumer safeguards.
Policy beneficiaries provide consent prior to the sale.
Prior to the sale of the policy, most purchasers in the life insurance secondary market (but not all, so be sure to ask) require the beneficiaries named in the policy to consent to the sale. This protects buyers and sellers alike against the risk of future litigation. (NOTE: This is not statutorily required – and cannot be – but it is a widely adopted industry practice.)
Buyers of life insurance policies must be licensed by the state.
I can’t think of any other case in which the buyer of any product must be licensed. (You don’t have to be licensed to buy a car—only to drive one!) But because of the important focus on senior protections, only companies that are licensed by the state insurance department where the seller lives can enter into a life settlement contract with that seller. Licensees are subject to background checks, are required to provide detailed business plans, and to submit and comply with stringent anti-fraud measures. That’s serious business.
If you’ve never seen an asset class with such carefully constructed consumer protections, the reason is simple: there simply is no other insurance or financial service transaction that is as highly regulated as the life insurance secondary market. These strict standards are vital to ensuring safe, legal transactions that are designed to deliver the best possible outcome for seniors who sell unwanted or unneeded life insurance policies for a significant financial windfall.
As a result of these best-in-class standards, there have been no consumer complaints or litigation against licensed life settlement companies since 2012. In fact, the only complaints reported involving life settlements over this same time period have been against life insurance companies that may have attempted to thwart the client’s sale of their policy.
Selling a life insurance policy in the secondary market offers flexible and significant financial benefits for seniors. From a regulatory standpoint, as well as for peace of mind, it is important to know that critical protections are in place. If you are recommending that a senior sells their policy, it is worthwhile to share these seven standards with them. It will not only increase their confidence in this market, it will further establish your own role in ensuring the transaction is truly in the best interest of the senior you are advising.