How Can I Protect Myself?
If you decide to go forward with a life settlement, here are some questions you should be sure to ask.
1. Is the life settlement broker or provider licensed in my state? A growing number of states regulate life settlement companies and life settlement brokers to some degree, and may require that they be licensed. Be sure to ask your state insurance commissioner whether the life settlement company or broker you are dealing with is properly licensedâ€”and whether either has a record of complaints. If you are working with a securities broker, NASD BrokerCheck should be your first resource to learn about his or her professional background, registration/license status and disciplinary history.
2. What will happen to my policy? Ask what the life settlement company that is buying your policy will do with it. Will they hold it themselves? Sell it individually? Or package it with other policies and sell interests in the package to other investors? The ultimate buyer of your policy will become responsible for paying the premiums and will collect the death benefit when you dieâ€”and, as noted below, any interim and ultimate buyers of your policy will also have access to a great deal of personal information about you, including your health status.
3. What information will I have to provide? To whom? For how long? When you sell your life insurance policy, you will have to sign a release authorizing the release of medical and other personal information so that the buyer can determine how much to offer for your policy. You may also have to agree to provide periodic updates about your health. Once the buyer obtains that information, it may be shared with other parties, including lenders or third party investors.
4. How can I protect my privacy? Before accepting any offer from a life settlement company, you should carefully read the application, and make sure that the company has procedures in place to protect the confidentiality of your information. If it will be sold, ask to whom, and whether the end buyers will have access to your personal information. If you use a life settlement broker, find out the names of the life settlement companies from whom the broker solicits bids, and ask about the privacy policies of all parties or potential parties to the transaction. In many cases, state regulations govern the handling of confidential information. Contact your state insurance commissioner to find out what regulations apply.
5. What's the best price I can get for my policy? If you are using a life settlement broker, ask what bids were received, and what steps the broker used to make sure you are being offered the most competitive price available. If you are approached by someone soliciting you to sell your life insurance policy, make sure you understand that person's role in the transaction: is he or she a life settlement broker who represents you, or is the person affiliated with a particular life settlement company? If the answer is the latter, the person may only obtain an offer from that company, making it hard for you to know whether you are being offered a competitive price for your policy.
6. What are the transaction costs? Life settlements can have high transaction costs. The commissions paid by life settlement companies to life settlement brokers and other financial professionals involved in the transaction can be as high as 30%. Ask your broker or other financial adviser what they are being compensated for their role in the transaction, and what other parties are receiving commissions. If someone recommends a particular life settlement to you, find out what they are being paid, and by whom.
7. What are the tax consequences? The lump sum payment you receive in exchange for your life insurance policy can be taxable, depending on your circumstances. Before entering into a life settlement, check with a tax professional about the tax implications of any transaction you are considering.
8. What if I change my mind? Always remember that you do not have to accept an offer to purchase your life insurance policy, even if you shopped around for the best price. If you do accept an offer and later reconsider, be aware that some states have laws that allow you to change your mind within a certain amount of time.
9. Is the life settlement in my interest or my investment professional's? At least one marketing brochure targeted at investment professionals not only touts the potential commissions from life settlements, but also emphasizes that additional revenues can be generated from the seller's purchase of other investment products using the proceeds from the life settlement. Citing industry statistics, the brochure notes that almost half of all life settlement transactions result in the purchase of new life insurance. In other words, your investment professional stands to make two commissions off of a life settlement transaction. And you may end up replacing a perfectly good policy with a costly new one.
Life settlements may make sense for people who no longer need or want their insurance policies, and would otherwise surrender their policies or allow them to lapse. But even then, you should proceed with caution. Consult with your broker or other financial services provider, and make sure that you:
* are dealing with properly licensed entities;
* are aware of the confidentiality policies of the parties involved;
* are getting a fair price; and
* understand the tax and other implications of the transaction.
Where to Turn for Help and Additional Resources
Life settlements can involve almost any kind of insurance policy, including variable policies. However, because only variable insurance products are securities, NASD only has jurisdiction over life settlements involving variable policies.
If you have questions or wish to file a complaint about a life settlement, be sure to call or write your state insurance commissioner. If your complaint concerns a variable life insurance policy, you may also file a complaint with NASD.