Life settlement disclosure sticking point for advisers

To discuss life settlements or to ignore life settlements — that’s the question insurance agents and registered reps who sell insurance policies are asking themselves in light of growing confusion over their responsibility to disclose the option of selling a policy that owners no longer want.

“Being licensed as a life agent involves counseling consumers on the pluses and minuses of owning the policy, and what’s been established is that it can be resold,” said Nat Shapo, a partner at Katten Muchin Rosenman LLP’s litigation and dispute resolution practice.

Attorneys and several life settlement industry executives have warned that clients who surrender their insurance policies or allow them to lapse because they weren’t notified of the secondary market could sue their advisers and agents for failing to make them aware of all of their options.

Agents should be held to a fiduciary standard that would obligate them to disclose all options, said plaintiff’s attorney Jon E. Drucker.

“The fiduciary-duty standard is whether the broker or financial adviser would be able to disclose anything that the average investor might even be possibly interested in knowing,” he said.

“If [agents] think it’s in the client’s best interest, then they need to make the client aware,” he added. “But then there’s the question of whether the life settlement is good for the client or is it something to garner more commission?”

Discussion of an agent’s or ad-viser’s role in notifying clients of the secondary market has begun to heat up as the Securities and Exchange Commission grapples with life settlements.

Currently, 34 states regulate life settlements, including three — Maine, Oregon and Washington — that require carriers to tell older Americans that they have options other than allowing their policies to lapse or be surrendered.

In Washington, carriers need not provide that disclosure through agents or advisers, but they cannot impede clients who want to sell their policies from doing so.

In Oregon, clients considering allowing their policies to lapse are told that there are other options, but they aren’t specifically told that there is a life settlement market. Maine is still figuring out how it will notify consumers.

Since producers are trained and licensed to help clients exercise the benefits of an insurance policy, and since the possible resale of the policy is among those benefits, agents can bring up life settlement to the client, Mr. Shapo said. That, alongside state laws, puts these financial professionals in a tough spot, particularly independent agents who aren’t bound to one insurance carrier, he added.

“This is more pronounced for the independent agent; they’re not beholden to one insurer who becomes their virtual employer,” Mr. Shapo said. “The further you go down the line between a pure captive agent and a pure broker, then the more concern the insurance professional has that the consumer could have and should have been informed of a potentially valuable option.”

Insurance companies have different ways of drawing the line on how advisers and agents can engage clients on life settlements. For instance, Prudential Financial Inc. doesn’t bind third-party independents from talking about life settlements. Captive agents, on the other hand, are prohibited from discussing life settlements with clients or referring them to someone who can manage those transactions.

To encourage clients to keep their policies, New York Life Insurance Co. has a program called AccessPlus through which it lends money to qualifying policyholders in order to pay premiums. The insurer also sometimes provides cash upfront to pay premiums and preserve the death benefit.

If clients aren’t interested in AccessPlus, New York Life career agents are allowed to suggest that clients approach more than one life settlement company, and they can refer interested clients to the Life Insurance Settlement Association’s website.

Axa Equitable Life Insurance Co.’s career agents, contracted through Axa Advisors LLC, may participate in life settlements in limited circumstances. If a client has a policy that’s no longer necessary, for example, and it doesn’t appear that the policy was purchased just to facilitate a sale on the secondary market, the client may be informed about life settlement. Producers aren’t barred from discussing the subject.

The Financial Industry Regulatory Authority Inc. doesn’t bar broker-dealers from participating in life settlements. However, if firms opt to participate in life settlements with variable-insurance products, they are expected to supervise that line of business.

If a firm doesn’t work with life settlements but a client asks about them, the firm may refer that client elsewhere.

Reps who become involved with a variable-life secondary-market transaction and fail to notify the firm run a risk of “selling away” and being fined or barred.

As a result, many major broker-dealers are concerned about their liability and don’t permit their reps to engage in life settlements.

“SIGNIFICANT BURDEN’

“Finra’s standards are good, but if you’re not doing much life settlement business, then the standards would impose a significant burden on the broker-dealer,” said Lawrence J. Rybka, president and chief executive of ValMark Securities Inc. The broker-dealer treats all settlements as securities transactions and discloses all compensation in all states.

Still, others noted that even if a client is notified of his or her right to sell a policy, firms may need to establish guidelines to prevent unsuitable sales.

Life insurance executives have raised this point in Maine out of concern that notices would go to too many individuals who were ineligible for a life settlement, said an official at the Maine Insurance Bureau, who asked not to be identified.

“There will be lots of people who can be harmed by a blanket requirement that you have to give everyone notice,” Mr. Rybka said. “It’s great for the settlements industry because they can sift through the dirt for gold nuggets. But for clients who can’t settle their policies, it’s going to cost them something to evaluate the option.”

E-mail Darla Mercado at [email protected].