5 Risks of Taking a Client’s Life Insurance Policy Directly to Providers

It has been roughly five years since the New York State Supreme Court paved the way for the implementation of Insurance Regulation 187. This rule, which took effect in February 2022, imposed a new standard for agents and brokers when issuing a recommendation to a client regarding an annuity or life insurance product: Advisors must act in the “best interest” of consumers when advising them on how to proceed with either a proposed or an existing annuity or life insurance policy.

Changing Regulatory Landscape

Other states, including California, Missouri, South Carolina, and South Dakota, quickly followed suit, taking various approaches to the establishment of new standards of conduct for brokers. But in general, we have seen a shift from the traditional “suitability” standard common in state regulations to the requirement that an advisor’s recommendations be in the “best interest” of a consumer.

Legal Precedent and Fiduciary Duty

The fiduciary obligation of financial advisors, as it relates to life insurance products, has been litigated in the courts. In the landmark case, Grill v. Lincoln National, the courts held that the failure of a broker to disclose information about the life settlement option as an alternative to policy termination could be financially damaging to a policyholder.

Guidelines from State Legislatures

The consistent guideline from a growing number of state legislatures and from the courts is that financial advisors have a fiduciary obligation to act in the best interests of their clients when making recommendations about how to invest their money or enter into transactions related to life insurance policies. Moreover, financial advisors have a fundamental ethical duty to put their client’s interests ahead of their own and provide unbiased advice about the various alternatives available to them if they wish to purchase or sell a life insurance product.

This article is the first in a two-part series that seeks to address the biggest mistake financial advisors are making when it comes to advisors and their fiduciary obligations related to life insurance policies.

The Risks of Direct Engagement with Life Settlement Providers

We continue to hear from clients and other industry participants about a serious mistake that advisors are making when working with a client who has decided to sell an unwanted life insurance policy on the secondary market in the form of a life settlement. That risky mistake? Taking the client’s policy directly to a life settlement provider and working exclusively with that one prospective buyer on a potential sale of the client’s policy.

There are five primary risks of taking a client’s life insurance policy directly to a life settlement provider:

Risk 1: Ignoring the Best Interest Standard

Life settlement providers do not represent your client’s best interests; they represent only the interests of the investors seeking to acquire your client’s life insurance policy. This is in direct conflict with your fiduciary obligation as a financial advisor.

Risk 2: No Way to Assess Offer

When working directly with a single life settlement provider, you have no way of knowing if you are receiving a competitive offer for the client’s life insurance policy. This would be similar to only marketing a house or a car to one prospective buyer, leaving you no realistic way to assess whether the offer you receive is appropriate.

For example, a 68-year-old woman named Margie decided to explore a life settlement after seeing a TV commercial and received a $20,000 cash offer for her $500,000 convertible term life policy. We were brought into the process and immediately began shopping her policy to multiple buyers, eventually securing a total of 16 offers and selling Margie’s term policy for $54,000 — a 170% increase over the initial offer from the provider.

Risk 3: Fair Market Value for a Life Insurance Policy

One buyer does not make a life settlement market. To determine the fair market value of any asset, you must offer that asset to all qualified prospective buyers and let the free market of buyers and sellers determine how much that asset is worth.

For example, a 69-year-old man named Ronald could no longer afford the premiums on his $300,000 universal life policy and decided to call a life settlement provider directly after seeing a TV advertisement. The provider offered him $10,000, but Ronald felt that price was unfair and contacted us to serve as his broker. We secured 22 offers from multiple qualified providers and were able to secure $64,800 for him—548% more than the offer extended by the direct buyer.

Risk 4: What If They Find Out…

Entering into direct negotiation with a life settlement provider creates a risk that you will steer your client into the sale of their policy for a price that was below what the policy might have fetched on the open market. If the client later discovers they might have received a higher sales price by negotiating with multiple prospective buyers, there may be significant legal or ethical exposure to your agency.

Risk 5: Blind Faith

It is rarely prudent to place your trust in a company that represents outside investors exclusively focused on maximizing investment returns. This is an act of blind faith in a counterparty that has no obligation to help you or guide you into a fair deal.

For example, a 78-year-old man named Jerry was on the verge of selling his $500,000 universal life insurance policy to a provider for $30,000 but decided to contact our firm "just to be sure" that the price was fair. We shopped the policy on the open market, obtained 10 offers for Jerry, and ultimately he obtained a check for $100,000 for the policy—233% more than the offer from the direct buyer that he was asked to accept on blind faith that the deal was fair.

Life Settlement Brokers: The Fiduciary Solution

Here is the bottom line. Life settlement brokers are legally bound to serve the consumer’s best interest. We fulfill that legal and ethical requirement by negotiating the highest possible sale price for the policyholder and providing complete transparency about the terms of the transaction. By contrast, life settlement providers have no such fiduciary standard and no legal obligation of the kind. They represent the buyer in a life settlement transaction, and their goal is to secure the lowest possible sale price for the investor.

“Because life settlements can generate substantially more cash for the policyholder than a surrender or lapse of the insurance, not presenting the life settlement as an option could constitute a breach of fiduciary duty,” reported ThinkAdvisor.

Guidance for Financial Advisors

A life settlement will not be appropriate for every consumer who no longer wishes to keep their policy in force, but taking a policy directly to a provider and working with one prospective buyer exclusively does not meet the fiduciary test of helping that client maximize the value of their life insurance asset.

Working with Licensed Life Settlement Brokers

If a client decides to explore the sale of their policy, then it is advisable to work with a licensed life settlement broker. The broker represents the policyholder’s best interests throughout the sales process and determines the policy’s eligibility. After initial eligibility is confirmed and the applicable paperwork and authorizations are completed, the broker will negotiate with multiple qualified life settlement providers who compete to extend the best offer to purchase the policy.

Conclusion and Next Steps

In the next article in this series, we will address the benefits of working with a licensed life settlement broker and why the broker’s fiduciary requirements to serve your client’s best interests ensure that you have fulfilled yours as well.

For More Information

For more information about the potential value of a client’s life insurance policy on the life settlement market, please contact an experienced life settlement broker such as Welcome Funds. We are required, both ethically and per applicable law, to represent the client’s best interests. The essence of our business is to always do the right thing for the client.