Elderly more open to selling life policies

CHICAGO — To add reserves to their retirement nest egg, more elderly people are considering the sale of existing life insurance policies, financial advisers say. But advisers and Washington-based NASD are warning about the potential for abuse in the lightly regulated life settlement business, in which a policyholder can sell an in-force contract for a percentage of its face value rather than surrender the policy for its cash value or let the policy lapse. Those associated with the life insurance settlement industry say that the business has grown in recent years primarily as retirees realize that these insurance policies are an asset they can tap. Monetary transaction In a February alert, NASD explained that the life settlement market emerged as a source of liquidity for terminally ill policyholders in the 1980s. However, the market has expanded rapidly in recent years, and NASD said that studies show that $5.5 billion in policies were sold in 2005, with the potential market exceeding $100 billion. “Because the life settlement industry is relatively new and may target seniors who may be in poor health, it can be prone to aggressive sales tactics and abuse,” NASD stated in an investor alert. Even brokers who work in the industry say that consumers must ask questions and make sure they understand exactly what types of commissions are being paid when they enter into a life settlement. Not all elderly people are ideal candidates for such transactions, said Matthew Canno, president of Philadelphia Settlement Brokers LLC. Elderly people who have paid off most of their debt, have their estates in order and whose children are older would be good candidates to consider selling their policies to another company, he said. Mr. Canno said that the industry needs to improve its fee disclosure so that individuals who sell their life insurance policies understand precisely how much they are being charged by the settlement broker. “Because of the lack of regulations, there have been a lot of people who aren’t upfront with clients,” he said. “It’s lack of disclosure.” Mr. Canno said that most people are liquidating their policies simply so they can put that money into high-performing accounts. It is likely that as the industry grows, more regulations will be required, said Anthony M. Faiola, president of Liberty State Financial Holdings Co. in Cherry Hill, N.J. “This industry isn’t regulated as it should be, and it wants more regulation,” he said. “Anytime the consumer feels they lost money, that’s when an issue arises.” Consumers need to approach brokers who have a history and reputation in this segment of the industry, Mr. Faiola said. Individuals who can’t afford their insurance premiums should seriously consider selling their life insurance policies, he said. Mr. Faiola brokers life settlement transactions but said he has advised clients against selling policies that were purchased to protect assets. In such cases, he has advised clients to “suck it up and pay the premiums to protect the estate.” Ethics also play an important role, and some consumers don’t like the idea that an impersonal company will earn large sums of money upon their death. Something to consider “If you can’t deal with the fact that someone makes money on your death, don’t do it,” Mr. Faiola said. Although few of Mark Kenison’s clients have expressed an interest in selling their life insurance policies, the certified financial planner with Waxhaw, N.C.-based Kenison Financial Services Inc., thinks that the idea is worth considering. He also anticipates more interest in life insurance settlements once baby boomers retire in large numbers. “Many people haven’t viewed it as a source of income for retirement,” Mr. Kenison said. “And people will need to consider it if they need more money,” he said. “I think it can be an appropriate strategy if there are a lot of boomers who are underprepared for retirement.”