DOL Fiduciary Rule Compliance: Life Insurance Sales and Fair Market Value

Financial advisors with retired clients are grappling with the implications of the new “Retirement Security Rule” published to the Federal Register on April 25, 2024.

The regulation adopted by the U.S. Department of Labor (DOL), which takes effect on September 23, 2024, updates the definition of an “investment advice fiduciary” pursuant to the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code.

The New Fiduciary Rule

The final rule requires “trusted investment advice providers to give prudent, loyal, honest advice free from overcharges.”  According to the DOL press release, it specifically mandates that “professionals who provide investment advice to clients must adhere to high standards of care and loyalty when they recommend investments and avoid recommendations that favor the investment advice providers’ interests — financial or otherwise — at the retirement saver’s expense.”

“Investors typically rely on financial professionals to navigate their way through a complex marketplace,” said Lisa Gomez, head of DOL’s Employee Benefits Security Administration,” in an interview with ThinkAdvisor. “But often investment professionals making the recommendations have significant conflicts of interest and often they have no obligation under the 1975 rule to act in the retirement investor’s best interest, even though they hold themselves out as doing just that. That’s not right.”

The new rule holds advisors to a stricter standard by requiring them to act in their client’s best interests when issuing recommendations about their retirement assets.

Best Interest Standard with Life Insurance Products

The new DOL fiduciary rule is preceded by a series of regulatory changes at the state level imposing new recommendation standards for insurance agents and brokers regarding life insurance products or annuities.

A New York regulation effective in 2020 requires that advisors must act in the “best interest” of consumers when advising them to proceed with either a proposed or an existing annuity or life insurance policy.

Other states — including California, Missouri, South Carolina, and South Dakota — have taken similar approaches to establishing new standards of conduct for brokers. The collective result is a clear shift from the traditional “suitability” threshold to the requirement that an advisor’s recommendations be in the “best interests” of consumers.

Best Interest Standard with Life Settlements

Ironically, many life settlement laws across the country, regulating secondary market transactions where policy owners sell their existing life insurance policies to licensed third parties (life settlement providers) for less than the death benefit but more than the cash surrender value, have included “best interest” language for years.  Such laws mandate that life settlement brokers owe a fiduciary duty to policy owners to act according to their instructions and in their best interest.

Furthermore, the fiduciary obligation of financial advisors to discuss options to lapse or surrendering life insurance products has been litigated in the courts.  Although the end result was a settlement between the parties, the landmark case of Grill v. Lincoln National produced an industry defining proclamation: the failure of a broker to disclose information about alternatives to policy termination could be financially damaging to a policy owner.

Ensuring Compliance

The new DOL fiduciary rule applies to anyone providing investment advice.  However, it also establishes an important ethical principle and expectation for all financial advisors to act in the best interests of their clients when providing recommendations about the assets they will rely upon to fund their retirements.

To fulfill the obligations related to a retired client’s life insurance policy — a potentially valuable asset of any portfolio — there is an obligation to help him maximize its value and obtain the fair market value of an unwanted or unneeded policy.

This due diligence process requires gauging the life insurance’s policy value as a life settlement.   The client may be able to sell his life insurance policy for a higher amount than he otherwise would obtain by lapsing or surrendering the policy back to the insurance company.

Don’t Make This Mistake

We continue to hear from clients and other industry participants about a serious mistake that advisors are making when pursuing a life settlement. What is it?  It’s taking the client’s policy directly to one life settlement provider and working exclusively with that one prospective buyer for its potential sale.

Providers do not represent a client’s best interests.  They represent the interests of the investors seeking to acquire a client’s policy, which directly conflicts with the fiduciary obligation of an advisor.  When working directly with a single provider, there is no way of knowing if a competitive offer is received.

The only way to determine the fair market value of any asset, including a life insurance policy, is to present it to multiple qualified prospective buyers and allow the principles of supply and demand determine its worth.

What To Do

It is important to work with a licensed and experienced life settlement broker, like Welcome Funds, who again, as referenced earlier, represents the policy owner’s best interests throughout the transactional process – it’s the law.  The broker assesses the policy’s eligibility, facilitates execution of the applicable paperwork and authorizations and negotiates with qualified life settlement providers who compete to extend the best offer to purchase the policy.

For more information about the potential value of a life insurance policy and fulfilling the fiduciary duty to act in the best interest of a client, please call 1-877-227-4484 or go to www.welcomefunds.com.