Seven Ways Seniors Are Protected from Long-Term Care Scams

By Chris Orestis

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 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 are the top seven standards that provide confidence to seniors and financial professionals that exploring the sale of a policy can be the right choice.

1. Selling a policy is a highly transparent transaction.
Prior to the sale of a policy, the seller receives numerous consumer disclosures. In some states, broker disclosure 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.

2. 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. It’s definitely a seller’s market.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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!) 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.

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 complaint 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.

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