Life Settlements: Bringing New Options to Life

Red Flag Reminder #102 - 6/26/06 - The life settlement business is growing fast.  According to Conning Research and Consulting, the business of selling unneeded life policies grew to $5.5 billion in face amounts in 2005, up from $3.3 billion in 2004. Bernstein Research cites higher in-force numbers ($13 billion in 2005), with potential growth to $160 billion.

With numbers like these, you may want to jump in headfirst.  But before you do, check out these red flags:

• What regulations affect settlements in your jurisdiction?  Depending on your state, you may need to get a settlement broker’s license.

• When is a life settlement suitable for a client? Typical reasons to sell include no longer needing or wanting the policy, needing money for healthcare expenses, no longer able to afford premiums, or having changing estate planning needs.

• Does the seller have an insurable interest in the policy?  Beware of any situation where the seller has no insurable interest, as defined by health, employment, or marital status.  And be especially careful with policies that were financed with the specific intent of selling them for cash.

• Have you researched the mechanics of settlements? It’s crucial to know how these deals work so you can properly advise clients.

• Have you done your due diligence on settlement brokers and providers? Despite improvements in recent years, shady entities still exist.

• Are you prepared to help the client sell the policy at the best possible terms or price?  This might take a lot of time and effort. An alternative:  use a life settlement broker to shop the market for you.

• Does your professional liability or errors & omissions insurance protect you from suits?  Ask your company, because there is no national standard for what carriers will and won’t cover.

Finally, ask yourself this: Since life settlements open up new options for clients with unneeded policies, do you have an ethical duty to discuss the concept?  More advisors these days are answering, “Yes.”

What “Red Flags” are affecting your business? The National Ethics Bureau welcomes your input. Send your comments to: redflags@ethicscheck.com