Why It’s Time For Life Insurance Agents To Rethink Life Settlements

Nearly every mature industry eventually faces trends or circumstances that force change. Taxi companies, for example, have to deal with the rise of ridesharing services Uber and Lyft. The taxi companies’ response to ridesharing was to battle fiercely to keep ridesharing out of their airports, cities and towns.

A similar but less extreme turning point may be brewing for the life insurance industry. Life insurance providers and their agents have long been resistant to the growth of the life settlement industry. It's understandable. Insurers are worried about profits lost from policyholders who choose to sell when they could surrender. But that point of view won't slow the rising popularity of life settlements. If anything, it could backfire. Prioritizing profitability over customers' needs is rarely a sustainable strategy.

The insurance industry's resistance to life settlements takes different forms. Agents might be pressured to avoid talking about life settlements with customers or even forbidden to be involved in any life settlement transactions.

Even simply ignoring the value life settlements can bring to policyholders is problematic. It's a subtle way of discouraging agents from educating themselves about life settlements. That's a disservice to policyholders because agents are likely the first point of contact for customers who are rethinking their life insurance coverage. Whether a life settlement is the right or wrong strategy in a given scenario, that conversation can't be handled effectively without some basic knowledge about how life settlements work.

Life insurance agents who are willing to look past the industry's dated perspective on life settlements stand to benefit -- not because life settlements are good or bad for the insurance industry, but because life settlements can be good for the insurance industry's customers.

Fiduciary Duty May Require A Life Settlement Discussion

If a customer reaches out to you, desperate to manage rising cost-of-insurance costs that are in excess of the policy's investment income, what recommendations do you provide? That customer could surrender all or part of the insurance to reduce the premium burden. A life settlement is also an option, however. And often, it's an option with better financial outcomes for your customer.

Whether you discuss the life settlement option with your customer might feel like your choice, but the courts could disagree. If you have a fiduciary relationship with that customer, failing to mention that it's possible to sell that policy could constitute a breach of your fiduciary duty. There has been some legal activity in this area, too.

In 2014, a California couple sued Lincoln National Insurance in a very similar scenario. Larry Grill and his wife held more than $7.2 million in life insurance coverage, but the premiums were too high. After consulting with their broker, they surrendered about $5 million of their coverage. The couple later learned that they could have done a life settlement instead. They filed suit on the basis that Lincoln National and its broker violated their fiduciary duty. The case was settled out of court, but not before the courts commented negatively on the insurance industry's practice of intentionally keeping customers in the dark about life settlements.

Regulations Enforce Transparency

While the courts may protect the policyholder's right to know about life settlements, state legislation also protects the policyholder's rights during a life settlement. Life settlements are currently regulated in 43 U.S. states. The bulk of those regulations are intended to enforce transparency and protect policyholders.

Many states, for example, require that policyholders receive all offers and counteroffers on their policies, along with disclosures about how a settlement could affect taxes and eligibility for needs-based assistance. Life settlement brokers must be licensed and must follow the fiduciary standard when representing selling policyholders. Incidentally, that's one reason to work with life settlement brokers, rather than providers -- brokers will act as fiduciaries to your client, but providers will not.

New Monetization Opportunities

Life settlements can raise cash for your policy-holding clients, but you might benefit financially as well. You can earn a referral fee from life settlement companies or brokers for any closed transactions that result from your recommendations. You can also continue to earn renewal commissions on policies that would otherwise lapse. Plus, once the settlement closes, you can guide your customers into products that better suit their current situation.

Despite resistance from taxi companies, Uber became a household name by offering a better service to customers. Fortunately, the life insurance industry is vastly more relevant and sophisticated than taxi companies were before the launch of Uber.

As well, there's no threat of life settlements replacing life insurance. Instead, there's an opportunity for the two industries to profit together. It's time for insurers and insurance agents to recognize this. Life settlements aren't a competition; they're simply another resource to advance the financial well-being of policyholders.

Lucas Siegel is the founder and CEO of Harbor Life Settlements. He may be contacted at [email protected].

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