For the past few years, LISA member Bryan Freeman, founder and president of Habersham Funding, has led the charge in an important legislative initiative in his home state of Georgia. After much hard work and persistence, that effort has now paid off . . . and Georgia seniors are the real winners.
History was made in April as Georgia Gov. Nathan Deal signed Georgia H.B. 193, the first state law that precludes life insurance companies from terminating or penalizing life insurance agents who inform consumers of options available to them as alternatives to lapsing or surrendering life insurance policies.
“Now, if life policy owners request to surrender or lapse a policy, agents may apprise them about and assist a policy owner to receive so-called living benefits under the policy, which may serve the consumer better than abandoning the policy,” said Freeman. “Equally important, HB 193 says that that life insurance companies cannot terminate, fine or otherwise penalize life agents for doing what agents have wanted to do all along – inform and assist life policy owners with these alternatives.”
This new law, “The Life Insurance Consumer Disclosure Act,” is refreshing in its simplicity: a one-page piece of legislation. The key language reads as follows: “. . . an insurer shall not terminate or otherwise penalize an agent for apprising a policy owner of alternatives to the lapse or surrender of an individual life insurance policy . . .”
Of course, to someone unfamiliar with the peculiar business practices often in place within the life insurance industry, it may seem odd that laws such as The Life Insurance Consumer Disclosure Act are even necessary. Do we really need legal protections for agents who are merely attempting to carry out their duties to advise their clients of all possible options they may wish to consider as wise stewards of their personal finances?
Yes, we do.
The disturbing truth is that many life insurance companies don’t want their customers to know about the options available to them if they no longer need or can afford the premiums on their policies. These options include: an acceleration of the death benefits in the policy; a reduction in the death benefit; maintenance of the policy through loans against the cash value; and selling the policy to a third-party investor through what is known as a life settlement transaction. Presumably, insurers want their policyholders to simply choose the option that is most profitable for the insurance company: lapse or surrender the policy back to the carrier for whatever cash value may be available.
Sadly, a majority of American seniors lapse their policies without knowing -- either by themselves or from their advisors -- that alternatives are available, including a life settlement. For example, 90 percent of seniors who lapse policies without knowing about a life settlement indicated they would have considered that option had they known about it and 79 percent feel their advisors should have informed them of the option.
The stakes are not small. In general, when life insurance policy owners enter into life settlements, they receive an average of seven times the amount of the policy’s cash surrender value, based on an analysis of a 2010 survey by the U.S. Government Accountability Office. A 2014 study by the London Business School found that Americans who sold their unwanted life insurance policies collectively received more than four times the amount they would have received had they surrendered them to their life insurance companies.
Of course, the most powerful way for insurance companies to make sure that policyholders remain ignorant of their actual options is to place a gag on the mouths of life insurance agents (i.e., the same trusted folks who sold the policies in the first place) and prevent them from informing consumers of the alternatives that exist to lapsing or surrendering the policy. This practice of silencing agents from informing their clients about alternatives to lapsing or surrendering their policies may be a dirty little secret to consumers, but it’s well known inside the industry. In fact, both of the Georgia bill sponsors -- Sen. Marty Harbin (R) introduced the Senate version and Rep. Carl Rogers (R) introduced the House version -- are life insurance agents.
Moreover, the life insurance industry has actively lobbied against efforts to promote greater consumer disclosure with respect to informing policyholders of options available to them that may be far more financially beneficial than lapsing or surrendering a policy they no longer need or can afford. In fact, even the historic Georgia law was initially introduced 15 months prior to its passage and signature by Gov. Deal, and was only passed by the state legislature after being stripped of other proposed requirements that would have been in consumers’ best interests.
As historic as it is, the new law in Georgia is just a start. It’s terrific that the state government there has taken a bold step to prevent insurance companies from silencing agents, but I am one of many who are calling for a “Seniors’ Right to Know” movement across this country. I believe that life insurance carriers in every state should be obligated to inform clients about the life settlement option for policies that are determined to no longer be needed or affordable, prior to lapsing the policies. This is especially important with respect to seniors, a group that includes some of our most vulnerable and financially challenged citizens.
To this day, just six states have adopted some form of the Life Insurance Consumer Disclosure Act, which mandates that insurers provide written notice to senior policy owners who are facing the lapse or surrender of their policies. We can do better. America’s seniors deserve to know the options available to them if they no longer need or can afford their life insurance policies so they can decide for themselves what is in their best interests.