From Wild West to Mainstream: Myths & Facts about Life Settlements

One area of the insurance industry has undergone significant innovation and evolution over the last two decades: Life Settlements. Yet, when the subject of Life Settlements is discussed among insurance distribution, you quickly discover there are two camps on the issue:

  • Camp 1 thinks of it as a “Viatical” and formed their opinions 10-20 years ago, before the transaction was fully regulated in the states.
  • Camp 2 understands it has evolved into a mainstream transaction and is a viable outlet for clients with life insurance policies to provide an economically alternative to the lapse or surrender of a policy.

The reality is that Life Settlements and the Viaticals of the past were unregulated, with some bad actors taking advantage and creating a Wild West environment. Over the last decade, however, the market evolved considerably. Today, 45 states covering 90% of the U.S. population have NAIC model regulations in place. There are numerous consumer protections, licensing and disclosure standards in place, and negative practices such as STOLI (Stranger Originated Life Insurance) were regulated into extinction years ago.

With TV commercials running on cable TV for a number years now; and more advisors, attorneys and accountants adding it to their practices, there is more awareness about Life Settlements among consumers than ever before. All of this awareness has driven a 28% increase in market growth in 2018 for a total of $3.8 Billion of life insurance policies settled—and market activity in 2019 is on pace to grow the market ever higher.

Yet myths about the Life Settlement market still exist. Here are a number of the most common ones, and the reality:

Myths and Facts

Myth: Carriers can prevent policy owners from selling their policy with a Life Settlement.

Fact: It is the legal right of a policy owner to sell their policy with a Life Settlement. Life Insurance policies are legally recognized as an asset and protected as personal property of the policy owner.

Myth: Life Settlements are not well regulated.

Fact: Life Settlements are regulated in 45 states under NAIC model regulations. The NAIC endorsed Life Settlements as a private market innovation to help policy owners pay for Long-Term Care.

Myth: Life Settlements lack consumer protections.

Fact: Life Settlements provide significant consumer protections, and there has not been one consumer complaint or litigation against licensed life settlement companies since 2012.

Myth: Lack of consumer awareness or interest.

Fact: Consumer awareness is at an all-time high driven by TV commercials, news articles, on-line information, advisor education and word-of-mouth. Consumer interest drove $3.8 Billion of Life Settlements in 2018.

Myth: Life Settlements are Viaticals.

Fact: Life Settlements and Viaticals are different transactions designed to help people based on their diagnosis or life expectancy. A Viatical is typically for a person who is medically certified with a terminal condition that would indicate a life expectancy under two years. Life Settlements are for people who have a life expectancy over two years and would not be considered terminal.

Myth: Agents and policy owners need to work through a Life Settlement broker.

Fact: A Life Settlement broker is neither required nor necessary for a Life Settlement. Agents and policy owners can work directly with buyers to sell a life insurance policy, and in the process remove the need for a brokerage commission being taken out of the offer to the policy owner.

Myth: Life Settlements are frowned upon by carriers and regulators.

Fact: State regulators long-ago worked with the industry to implement NAIC model regulations that have been guiding the marketplace ever since.  Many carriers actually participate in the Life Settlement market as buyers, and their opposition to the transaction has reduced over the years, but some resistance by carriers to the transaction still remains.

Myth: Life Settlements are not allowed by Broker Dealers or Registered Investment Advisors.

Fact: There are many Broker Dealers that allow and participate in Life Settlements. Any type of agent or advisor can work with Life Settlements. Some must obtain an OBA waiver (Outside Business Activity), and some fee-only advisors forego compensation.

Myth: Taxes are complicated and a problem for Life Settlements.

Fact: There are two ways that Life Settlements are taxed:

  1. If the policy owner is chronic (2 ADL’s or more) or terminal, the proceeds from a Life Settlements are tax-free.
  2. It the policy owner does not meet this standard, the proceeds from a Life Settlements are taxed as capital gain for any amount received above their basis in the policy.

Myth: There is no fiduciary obligation surrounding a life settlement.

Fact: There are at least three settled court cases of policy owners suing their advisor and the carrier for keeping information about a Life Settlement from them before they lapsed or surrendered a policy.

Life Settlements have evolved over the last two decades, while moving very much into the mainstream and public awareness. Misconceptions about the market based on outdated practices ae being left behind by innovative agents and advisors. It is in the best interest of advisors to be up to speed on where this market is today. Life Settlements as a tool to help their clients rescue a policy that would otherwise be lapsed or surrendered, and in the process add another revenue opportunity to their practice.

Chris OrestisChris Orestis is a nationally recognized industry leader and expert in the fields of life settlements and alternative funding strategies for seniors.