by Sean Quinn
Lincoln National Life Insurance Company is embroiled in court proceedings in the U.S. District Court in Riverside, Calif. Lincoln denies all of the allegations in a lawsuit filed by Larry and Joan Grill alleging fraud and deceit, financial elder abuse and unlawful, and unfair and fraudulent business practices.
In 2004, Larry and Joan Grill bought a second-to-die policy with a death benefit of $7.2 million. When the policy’s investment returns didn’t cover the cost of insurance, the agent told the couple that they had just two options: pay new premiums to extend the policy or surrender part or all of the policy. In 2008 the Grills reduced coverage to just over $5 million; the following year they further reduced coverage to just $2 million in order to save money.
The Grills allege that they would not have had to reduce the coverage if they were told about the option to sell or settle their policy. The complaint states that the defendant purposely omitted this information from the plaintiffs and class members knowing that other options would generate greater profits than would a life settlement, such as surrendering the policy (in whole or in part) or letting it lapse. The court documents go on to say that the defendant’s common and regular practice is the active concealment of the life settlement option, and is a pervasive practice in the life insurance industry. The defendant instructed its own agents as well as independent agents to conceal the option of a life settlement from insureds.
Although Judge Jesus Bernal dismissed several of the claims, he let stand the central allegation, which states that Lincoln had a duty to tell the Grills about the option to settle the policy. The judge stated, “The Court agrees that plaintiffs have sufficiently alleged a duty to disclose based on partial representations by alleging that defendant’s agent represented that they had two options and concealed the life settlement option.”
What does this mean for the life agent community? This on-going case clearly raises immediate issues for the life agent community. First, is the duty to disclose part of an agent’s fiduciary duty to their client? Indeed, a life agent’s duties are increasingly being compared to those of financial advisors under the Dodd-Frank Act. However, it also raises the question of education of the agents. Research has demonstrated that many life agents have little, if any, understanding of life settlements and their potential benefits to their clients.
The above are just two examples in which settling a policy was the best option for the client. There will be cases in which settling the policy is not the best option. Agents would not be fulfilling their fiduciary duty if they failed to disclose the possibility of a life settlement (intentionally or otherwise).
Disclosing the possibility of a life settlement can be seen as the first step in fulfilling fiduciary duty. In order to advise a client properly, a life agent needs to have, at the very least, a good understanding of the life settlements market and the potential value of a given policy if it were sold. Life agents can get an indicative value of a life policy by using third parties, such as actuaries or life settlement providers, or by using specialist valuation software developed for the life settlements market. By using completely independent valuers or specialist software, agents can ensure that the valuation is unbiased with no conflicts of interest. Again, an essential part of fulfilling fiduciary duty is to get the best possible outcome for the client.
Like almost any financial market, the life settlements sector has attracted its share of criticism (some of it deserved) due to unscrupulous dealings and policy manufacturing. However, legislation has now caught up and, when used properly, the benefits of life settlements to the insureds are plain to see. Nevertheless, it is critically important for agents to understand the process, the potential benefits and pitfalls and, above all, to always act in the best interests of their clients. In so doing, agents will enhance their relationships with their clients and potentially open up entirely new (and not insignificant) earnings streams.
Life Settlements –The Basics:
What is a life settlement? A life settlement happens when the policyowner sells a life insurance policy to a third party for more than the surrender value, but less than the face amount. In the vast majority of cases, the insured has a very short life expectancy due to terminal illness (less than two years) or is over 70.
There are a number of reasons why an insured might sell a policy (assuming that the insured has been made aware of the existence of the life settlement option) including the following:
• Premiums becoming too expensive.
• Family circumstances have changed.
• Estate planning requirements have changed.
• The policyholder wants to fund new life policies, annuities, or other investments.
• The policyholder wants to fund long-term care costs. (Several states have introduced or are in the process of introducing legislation to allow benefits when life policies are sold for Medicaid purposes).
Generally, life settlements are sold through licensed providers who represent the buyers. They are sold by insurance agents or life settlements brokers who represent the interests of the sellers. The amount at which a life settlement might be sold will vary according to the life expectancy of the insured, the policy characteristics (including the premium profile), and the demand for a particular type of policy in the market. The market acts on an auction type basis and prices are therefore affected by supply and demand.
While it is clear that settling a policy is not always the right solution, there are occasions when, not only is it the correct solution, it may also be financially beneficial to the client as shown by the following examples:
• Male and female, age 72
• Originally bought a joint policy for estate tax planning reasons. Due to a change in the law, the policy was no longer needed.
• Face amount: $2,000,000
• Policy type: joint survivor life
• Annual Premium: $47,700
• Cash surrender value: $15,500
• Life Settlement amount: $245,000
• Gain by settling compared with surrendering: $229,500
• Female, age 82
• Sold this policy and bought a new, more cost efficient policy saving her $5,000 annually in premiums.
• Face amount: $1 million
• Policy type: universal life
• Annual premium: $47,700
• Cash surrender value: 0
• Life settlement amount: $225,000
• Gain by settling compared with surrendering: $225,000
Sean Quinn is group chairman for Cambridge Guarantee Group. Founded in January 2007, the Cambridge Guarantee group of companies (www.cambridgeguarantee.com) has become a recognized leader in the longevity/life settlements market sectors. The group is not affiliated to any purchaser, agent or broker. The group is led by a highly experienced management team and works with a variety of blue-chip partners to provide a range of products and services from policy valuation and due diligence, to software design and development for institutions in the life settlements and alternative assets markets. Cambridge Life Analytics (www.cambridgelifeanalytics.com) is a specialist online life settlement valuation solution with flexible subscription packages starting from just 24 hours.