Sadly, we have seen a number of negative news stories about the life settlement industry in recent months – from the media coverage of fraud at publicly traded settlement provider Life Partners to articles from personal finance writers who largely rehash tired arguments about our industry. Despite the criticism, we know that life settlements fill an important void when life insurance coverage is no longer needed or becomes too expensive.
There are several key questions that wealth managers and their clients should ask of provider companies when they are considering life settlements.
Sadly, we have seen a number of negative news stories about the life settlement industry in recent months – from the media coverage of fraud at publicly traded settlement provider Life Partners to articles from personal finance writers who largely rehash tired arguments about our industry. Despite the criticism, we know that life settlements fill an important void when life insurance coverage is no longer needed or becomes too expensive. All life settlement providers will explain that the transactions are not for every consumer. Seniors today should view life insurance as an asset that can be liquidated, while wealth managers should recognized the transaction as a novel way to put money in motion.
All that being said, there are several key questions that wealth managers and their clients should ask of provider companies when they are considering life settlements.
How is the life settlement provider, which will ultimately purchase and own the policy, capitalized?
Today, life settlements are a billion dollar industry with major institutional funders at the forefront. If a life settlement provider is cagey about how they are capitalized or appears to be funded by individual “mom and pop” investors, then you are better off looking elsewhere. The investment side of the industry has completely changed since the business began 25 years ago, and individual investors (aside from a select group of accredited investors) truly have no place in the industry.
Why does this matter as long as the client gets their money? First, the new owner of the policy will continue to have a relationship with the client after the policy is sold. The client will be required to periodically make contact with the life settlement provider for the remainder of their life, so you want a provider who is capitalized for the long-haul. The policy will become one of many in a portfolio which investors believe will behave predictably over time. Institutions are looking at the overall portfolio performance and not that of one policy. (Note: while investors do get paid when the client passes away, it is fantasy to think that investors would somehow try to promote their demise.) Quite honestly, in this situation you want an owner who will treat your client like a number.
How will the life settlement company treat private information and what type of information is the client required to provide now and in the future?
A life settlement requires more information than other financial transactions. Because a life expectancy calculation serves as a key component of the life settlement equation, a provider will require medical information from the client as well as the release of medical records. Reputable provider companies should follow guidelines set by the Health Insurance Portability and Accountability Act (HIPAA) and treat medical information with complete confidentiality.
Clients should provide an insurance policy illustration along with a release enabling the provider to secure the aforementioned medical records.
Clients should also discuss the tracking process with potential providers. After a transaction is completed, they will be required to periodically "check-in" with the provider company in a manner that the client is most comfortable. Most life settlement companies have developed processes to manage this easily and discretely, but a client should ask questions and be amenable to the process.
What are the costs of the transaction and how does this impact the offer?
The life settlement offer calculation is complex, with many variables -- each transaction is unique. Just a few of the factors: age and health of seller, policy face value, premium cost, life expectancy of seller, surrender value, carrier rating and policy type among others.
A life settlement provider must determine the cost of paying the premiums far into the future and match these carrying costs against the life expectancy estimate. The policy must be serviced over time and the seller tracked (as mentioned above.) All of these add costs.
In addition, life settlement companies build in long-term profits to counterbalance their risk and must also account for commissions paid to financial professionals who advise clients on the transactions.
Advisors and clients should expect a detailed offer which explains all of the aforementioned costs and presents them in a transparent method.
Hopefully, these answers haven't just created more questions, but it they do, please don't hesitate to ask. Also, some life settlement companies now provide free and easy policy evaluations which help wealth managers and their clients assess life settlements now and plan for them in the future.
Stephen E. Terrell is Senior Vice President of Market Development and Branding of The Lifeline Program, a life settlement provider based in Atlanta, Ga. You can also follow him on Twitter @LifelineProgram