Many experts believe that in 2006, the growth will increase to over $15 billion. This is for a variety of reasons, but primarily because insurance producers and financial professionals are becoming aware of the opportunities for themselves and their clients within this secondary market. If your client is planning on surrendering or letting their life insurance policy lapse, as a financial professional, you have a fiduciary responsibility to inform your client that there is a secondary market for life insurance policies.

The obvious sources of a life settlement are those individuals that are going to surrender or lapse their policies. This could be for a number of reasons, ranging from not having a need anymore, to not being able to afford the policy, to having a policy that was going to implode due to incorrect payment assumptions.

But there are also other reasons why a life settlement may be an attractive alternative. For example, today, the universal life and variable life policies may have policy features that were not available five or more years ago. These features could be extended maturity riders, no lapse guarantee riders, lower loads or mortality assumptions, etc. If the client is healthy enough to qualify for new insurance, but sick enough to get a high offer on their old policy in a settlement, it may make sense to sell the old policy in order to get a new one with the newer policy features. The proceeds from the settlement could be used to defray the cost of the new policy. There may even be an opportunity to increase the death benefit when applying for this new coverage. The ideal situation would be to write the new coverage with a carrier where the agent can get standard rates through Table 6. In that situation, the new premiums are lower than they would otherwise be, and because of the health issues, the settlement offer would in all probability be higher on the old policy.

Another situation might be one where there was an estate tax problem and a second to die policy had been purchased. There are several situations that may lead to a settlement that could be explored. One of those situations is what was mentioned above, dealing with the policy features and benefits. Another may be that with the estate tax exclusion rising, the estate tax planning need may be diminished and the policy can be reduced or eliminated, thus leading to a settlement. In some cases, the insurance carrier may even allow the second to die contract to be split into two policies. Generally, they split the cash value and face amount of insurance in half. A strategy to be used in this case could be to sell the policy with the lower Life Expectancy evaluation (LE), and use some of the proceeds to fund the other policy until such time that the sale of that could be more profitable.

In the situation in which a client carries an amount of insurance that is at the high end of what they need or can afford, they could split it into two policies. Presuming the policies are out of the contestability period, you can then sell one of the policies, and use the proceeds to fund the other, thus reducing the cash outlay on a long term basis. From a producer’s perspective, there is an opportunity to help the client, continue to get paid on both life insurance policies, and on the life settlement of one of those policies when it is sold.

Working with corporations that have too much key man insurance on key executives could also provide an opportunity for a life settlement. In many cases, the insurance is either term insurance, or fairly low cash value insurance. The corporation, at the termination or retirement of that key executive would receive very little in surrendering the policy. The opportunity for a life settlement could potentially give a significantly higher amount of money back to the corporation, and the corporation may even pass some of that on to the insured key executive.

Any of these situations could be a source of life settlement “inventory”. As a financial professional, you can review your book of business of existing clients to see if any would benefit from the above situations, or target your marketing efforts to address any of those situations.

There is also some due diligence that should be done by any financial professional that is going to submit a potential life settlement case to a provider. This due diligence is obviously with respect to the service, financial ability to purchase policies, and method of conducting business, but it goes well beyond that. Some questions to ask a provider might be “What happens to the policy when it is sold?”, “Where does the money come from that is purchasing the policy?”, “Who will own the policy?”, “Will it be managed to maturity by the purchaser?”, “Will the policy be resold?” These are all legitimate questions that an insured might have and want to ask, for a variety of reasons.

Peace of mind for the insured should be assured when a policy is being sold. The financial aspect is not the only thing of importance. With respect to where the money is coming from, or any of the other questions for that matter, see what privacy laws exist in the investing country, and whether the owners are individuals or institutional investors. A situation could arise, where an insured could sell their policy to a life settlement provider, and later find out that there are 20 or more individual owners/beneficiaries of that policy. Those owners could know who the insured is, where they reside, and have all of their personal information. There also could be the possibility that the policy could be resold to another institutional investor, having yet another party that is not subject to the regulatory scrutiny and accountability, and not subject to the reach of United States law. Consequently, there could be significant angst on the part of the insured, if that situation exists for them.

As a financial professional advising and assisting a client to sell their insurance policy in a life settlement, you should try and find a provider that uses primarily institutional funds to purchase the policies. These institutions may have stricter guidelines on what they will purchase. The funds should be held in a securitized fund, so that there is a high degree of compliance in how the investments are handled. The securitized models afford greater accountability not only to the insurance departments, but also to the Securities and Exchange Commission (SEC), state securities commissions, the NASD and international securities authorities. An area of concern could be that some providers sell securities under SEC Regulation S, which does not require compliance with U.S. securities compliance and disclosure standards. You should find a provider that will manage the funds in that security, and the policies themselves, to maturity (the death of the insured) here in the United States, under United States law. In addition, there are some providers that will do the above, and manage the policies in a blind trust, so that the investors do not know who the insured’s are. By working with a company that does all of the above, the client would be secure in knowing that United States privacy laws would be adhered to, and that the funding itself is highly compliant.

Some providers choose not to use a securitized model, because it is not easy and it is not cheap, and results in less profit to the provider. However, by working with a provider that does use a securitized model, there is more protection for the policyholder, in that they can be confident that there is full disclosure and total transparency, in order to meet the SEC mandated full and fair disclosure guidelines.

With this part of the insurance industry, and the life settlement being in its infancy, working with organizations that do things right will go a long way to satisfying the regulatory environment and to assuring that the industry will continue to grow and prosper.

Currently, there is a high level of scrutiny into the life settlement industry by the various insurance departments, insurance companies, and even legal authorities. Most of the concerns stem from assuring that there is strict compliance to the laws, to the interpretation of those laws, and to adherence of ethical conduct in carrying through a transaction. The life settlement industry as a whole is new, and limited in the regulation applied to it. The laws that do exist today vary from state to state. There is proposed legislation in various states that would require disclosure of compensation, guidelines for insurance companies to adhere to in completing a transaction for the benefit of the insured, and restrictions in the role that producers, brokers, and providers can play in the completion of a transaction.

Because the life settlement industry is in the early stages of growth, it is particularly necessary to establish a solid reputation that the transactions are being carried out properly. Doing otherwise could damage the future growth potential of this industry.

¹ Conning Research & Consulting, Inc., “Life Settlements. The Concept Catches On” 2006