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Q3 - Vol. 2, No. 1, July 2005 Life Settlement News
Seniors Are Beginning to Drive Our Marketplace
The word is out. Seniors who have chosen to do life settlements are discussing the subject with their friends and social network. We know, because we are being contacted on a regular basis by the financial advisors and CPAs who are asked by these seniors to assist them with a life settlement. In a recent article we published in the AICPA's "CPA Insider" newsletter, we address this topic and provide guidance to financial professionals who want to go the next step. Read the advice we are giving to financial advisors whose senior clients want to receive the highest possible offer for their life insurance policy. Click to download CPA Insider article.
by Tom Offutt, Compliance Director (Page down to view complete article)
CPAs: Key Advisors to Seniors
Approaching Seniors with the Big Picture: Let Them Know All the Options
If a senior is planning to let a policy lapse or surrender it, there is no question that a life settlement should be explored. However, it is important to explore a variety of scenarios with your senior clients that include the benefit to them of keeping the policy in force; the option to replace the policy using the proceeds from a life settlement; or conducting a life settlement and using the proceeds for other purposes if replacement coverage is not needed. We have developed an exclusive spreadsheet analysis that is a useful decision tool for producers who want to give seniors the "big picture."
If you and your client are considering a life settlement and your client wishes to combine that transaction with replacement coverage, our spreadsheet analysis is just the tool for you. We do all the work for you and provide you with a comparative analysis that involves (1) retaining the existing insurance; (2) transacting a life settlement with replacement coverage; (3) or conducting a life settlement only. This comparative analysis enables you and your client to decide the best option given the specific circumstances. If you have a case and would like us to run the numbers, click here to order your free Life Insurance Analysis and Options spreadsheet.
Community Foundation Receives $1.395 Million Life Settlement
Advanced Settlements recently closed a life settlement transaction involving a $4 million life insurance policy that had been donated to one of the nation's largest community foundations. The community foundation received $1.395 million -- or approximately three times the cash surrender value.
"We believe this is a groundbreaking event," said Sean McNealy, Co-President of Advanced Settlements. "Although we are working with other charitable organizations, this is by far the largest settlement we have seen in the non-profit arena." McNealy added that many charitable organizations who own donated life insurance policies are still not aware that they may, with the donor's consent, pursue a life settlement on policies for seniors over the age of 70. That's why Advanced Settlements believes it is important to educate planned giving and development officers of the product and guide them in understanding when a life settlement is appropriate.
Charities should consider pursuing a life settlement if they are struggling to pay the premiums, if the policy is in danger of lapsing or being surrendered, if the insured expressed an interest in seeing the policy's hidden value tapped while he/she is still living, or if there is a concern that the insurance policy may not be strong enough to pay the death benefit, (i.e. is the insurance carrier rated less than BB+ by rating agencies such as Moody's or A.M.Best).
Charitable organizations learning about life settlements for the first time may want to take a second look at their gift acceptance policies and consider whether it would be appropriate to encourage their donors to pursue a life settlement and donate the cash, which can be immediately applied to a donor advised fund or the donor's legacy. VLSAA Experiences Growth: Scott Kirby Appointed PR Chairman Membership in the Viatical & Life Settlement Association of America (VLSAA) has increased to over 80 members within the past year, a clear indication of the growth we are experiencing in the marketplace. The mission of the Viatical and Life Settlement Association of America -- which is celebrating 10 years of service to the public -- is to promote the development, integrity and reputation of the viatical and life settlement industry and to further a competitive market for the people it serves. "We are pleased to see expansion in the marketplace which is attracting membership to VLSAA," said Scott Kirby, Co-President of Advanced Settlements, and VLSAA Board Member. Kirby, who was recently appointed public relations chair for VLSAA, explained that the organization is improving its communication outreach activities, which includes a newly redesigned web site (www.viatical.org), more frequent news releases and hopefully magazine ads. "It is important that we educate legislators and regulators, as well as the general public, about the organization's efforts to promote the value proposition of life settlements," Kirby added. "As we move forward, we plan to more communicative on issues that impact our membership and the industry as a whole, such as our reaction in June to the Deloitte-UCONN study," Kirby said. View press release. Doug Head, executive director of VLSAA, commented on what he terms "phenomenal growth" which has doubled the association within the past year. "We are seeing evidence of high professionalism and interest in our industry from other professions -- such as attorneys and CPAs who are gradually becoming aware of the role life settlements play in their practice." Public Policy & Life Settlement Regulation: Financial Professionals Should Be Politically Active
As the life settlement industry advances into the mainstream of the financial services marketplace, we are seeing an increase in regulatory activity. Although we welcome prudent oversight that balances the interests of consumers and businesses engaged in life settlements, we are mindful that good public policy does not happen on its own. We believe it is important for financial and insurance professionals to meet regularly with their elected representatives to keep them abreast of the positive impact of life settlements for seniors, for financial advisors, and for the economy as a whole.
Recently, Advanced Settlements met with a number of elected officials in the State of Florida to discuss the status of the industry. When approaching elected officials and regulators, it is important to communicate the value proposition to consumers. For example, within the past eight months (November 2004 through June 2005), Advanced Settlements processed life settlement transactions totaling approximately $71 million beyond cash surrender value. "That is a substantial amount of money going into our economy in the form of replacement coverage, investments, expenditures for long term care, and other purposes," said Sean McNealy, Co-President.
Due Diligence and E&O Coverage: How Do I know I'm Covered for Life Settlements? Life insurance carriers and Broker-dealers that issue internal bulletins to their sales force often issue recommended advisories to remind the producer or registered representative of the importance of performing sufficient due diligence when considering a life settlement in order to assure the settlement is in the best interest of the client. This is sound advice coming from insurance carriers and broker-dealers that allow their producer or registered representative to participate in such transactions as an authorized outside activity. Among the laundry list of recommended items to consider in performing this due diligence is the firm’s recommendation to the producer or registered representative to obtain Professional Liability or Errors & Omissions (E&O) Insurance Coverage. The most common statement made on this point by these firms is … “most E&O plans covering the producer, or registered representative under a broker-dealer, do not cover viatical and life settlement transactions.” The carrier or broker-dealer recommends that the producer or registered representative obtain adequate E&O coverage, separately, before participating in these settlements. While this is the typical recommendation, in reality, separate coverage is often cost-prohibitive for most producers. The alternative recommendation by the carrier or broker-dealer is not to do business with a viatical or life settlement broker or provider unless they furnish the producer with a minimum of $1 million per loss limit of E&O coverage. [Advanced Settlements carries $3 million (per claim & aggregate) coverage.] Producers and registered representatives need to be certain that they are in fact covered by the viatical or life settlement broker or provider. It could be a costly mistake not to see evidence of the policy and the specific endorsement that covers the producer for referring the life settlement to the viatical settlement broker or provider. Some producers mistakenly believe obtaining a Certificate of Insurance with their name affixed is proof that they are covered under the viatical settlement broker or providers’ policy. A Certificate of Insurance merely demonstrates evidence of an insurance policy. This document provides no coverage to the Certificate Holder and rarely guarantees that the Certificate Holder will be notified if there is a policy cancellation. The best evidence of insurance is to request a copy of the viatical settlement broker’s or provider’s Declarations Page and specific endorsement that demonstrates the participating producer or registered representative is covered under the policy or better yet, a copy of the entire policy. So what, in addition to the firm’s directives, is the best advice to follow for the producer or registered representative on this subject? In the immortal words of President Ronald Reagan…."trust but verify."
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Due Diligence and E&O Coverage:
How Do I know I'm Covered for Life Settlements?
When discussing life settlements with prospective
senior clients, it is important to weigh all the options. Producers
should ask themselves: "Is a life settlement the best solution for this
client in this specific situation?" We have a tool that can help you
answer that question. Learn how a life settlement with replacement
coverage could be the best option for your client.