Life Settlement Market Experiences Growth while Consumer Best Interest Regulations Gain Ground
In the financial sector, the term “best interest standard” generally means setting aside one’s personal interests and working for the good of the client at all times. The phrase is often associated with professionals who have a fiduciary duty to act in their client’s best interests. Examples of fiduciary professionals include bankers, money managers, financial advisors, accountants, attorneys, executors, and life settlement brokers.
Looking back over the past decade following the 2008 financial crisis, it is noteworthy that the regulatory focus on implementing consumer best interest rules has gained traction at both the state and federal levels.
During that same period of time, the life settlement market has experienced significant growth. According to a 2020 study by industry researcher Conning Company, the life settlement market continues its upward trend and is expected to grow by double digits in the coming decade.
At Asset Life Settlements, we believe it is important to examine the factors contributing to the market’s growth, and to evaluate whether recent regulatory initiatives are helping to fuel the number of cases being brought to market.
Life Settlements and the Client’s Best Interests
To those of us who operate in the secondary market for life insurance, it comes as no surprise that the increased attention on consumer best interest regulations is causing some fiduciary (as well as non-fiduciary) professionals to consider the connection between life settlements and their duty to their clients.
Many fiduciary professionals believe it is their obligation to inform clients aged 65 and over of the option to sell an unwanted life insurance policy in the secondary market for (on average) 25% of the policy’s face value resulting in a substantial cash windfall for the client. The alternative would be to surrender or to allow the policy to lapse, thereby forfeiting the opportunity to recoup a substantial portion of the client’s premium investment. Such an outcome is clearly not in the client’s best interests.
Below is a sampling of the most notable best interest regulations that have surfaced over the past several years. We believe these and similar consumer-first initiatives have the potential to help shape the future growth of the life settlement market as greater numbers of fiduciary professionals gain a firmer understanding of the connection and what it means for their clients.
U. S. Securities and Exchange Commission
In June 2019, the SEC adopted Regulation Best Interest (Reg. BI) under the Securities Exchange Act of 1934. The new regulation established a "best interest" standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities. Compliance enforcement for the new regulation went into effect on June 30, 2020.
Although life settlement transactions are not considered securities and therefore do not fall under the compliance guidelines of Reg. BI, some financial advisors who operate in this “best interest” environment are voluntarily applying the spirit of the regulation to certain clients who may be candidates for a life settlement.
These advisors recognize that a life insurance policy is considered personal property and is an asset that should be managed and optimized to benefit the client’s best interests. Allowing a client to surrender or terminate an unwanted policy that could have substantial monetary value clearly runs contrary to the spirit of Reg. BI.
National Association of Insurance Commissioners
In a February 13, 2020 press release titled, “NAIC Takes Action to Protect Annuity Consumers: State Regulators Update Model to Require Insurers to Act in Customer's Best Interest,” the NAIC stated that it had revised its model act to clarify that all recommendations by agents and insurers must be in the best interest of the consumer, and that agents and carriers may not place their financial interest ahead of in the consumer’s interest in making the recommendation. The model now requires agents and carriers act with “reasonable diligence, care and skill” in making recommendations.
In terms of next steps, it is now up to each individual state to decide whether to adopt the new standard. As of May 2021, the following states have implemented the NAIC best interest standard: Arizona, Arkansas, Delaware, Idaho, Iowa, Michigan, Nebraska, North Dakota, and Rhode Island.
New York State Department of Financial Services
On August 1, 2019, New York’s Department of Financial Services finalized Insurance Regulation 187, “Suitability & Best Interests in Life Insurance & Annuity Transactions” (Reg 187), which outlines NY’s version of best practices for annuity and life insurance sales.
Reg. 187 imposed a best-interest standard on recommendations to purchase, replace, or alter life insurance and annuity products sold in New York State. According to the NYSDFS, a goal of the amended regulation is to “fill in regulatory gaps” resulting from the elimination of the U. S. Department of Labor’s Fiduciary Rule.
However, on April 29, 2021, the New York Supreme Court Appellate Division struck down New York’s Reg. 187 stating: "While the consumer protection goals underlying promulgation of the amendment are laudable, as written the amendment fails to provide sufficient concrete, practical guidance for producers to know whether their conduct, on a day-to-day basis, comports with the amendment's corresponding requirements for making recommendations.”
So what does this mean for registered reps and insurance producers operating in New York and who had already begun to comply with the new reg?
According to a May 26, 2021 article published by Financial Advisor, the New York Department of Financial Services is expected to appeal the court’s decision. As part of the appeal, DFS could also ask for a stay of the amendment, which would mean that companies and registered reps would need to comply with the rule until the appeal is decided.
Trade Media Articles Reflect the Market’s Momentum
The momentum we are seeing in the life settlement market can also be gauged by the increased number of articles in professional trade publications and other news media widely read by financial and insurance professionals. The demand for objective and informative articles on this topic is a positive sign for financial professionals as well as their clients in terms of the merits of the secondary market for life insurance.
- On March 28, 2021, writers for Forbes published on article titled “Life Settlements Provide Escape Hatch When You Need Cash.” The article explained that a life settlement can be a way to get cash for a life insurance policy you no longer need or can no longer afford. The writers noted that “…For older adults who are struggling to pay for health care costs or long-term care in retirement, it can be a much-needed lifeline. Yet many people don’t even realize this option exists.”
- On May 18, 2021, InvestmentNews published an article titled “Life Settlements Seen Increasing as Population Ages.” Staff editor/writer Mary Beth Franklin poignantly illustrates the lost opportunity when she wrote: “A 2013 report from the London Business School estimated that life settlement proceeds are, on average, about four times more than cash surrender values. Unfortunately, many Americans don’t know about the life settlement option. An estimated $200 billion worth of life insurance is expected to lapse or be surrendered each year through 2027, according to a 2018 study by Conning, an investment management firm. The projected $200 billion in lapsed or surrendered policies each year is potentially worth $50 billion on the life settlement market, assuming a payout rate of 25%.”
The increased regulatory attention on consumer-first regulations is contributing to broader awareness of the life settlement market as a safe, sensible and profitable solution for seniors with unwanted policies.
While the regulatory initiatives described above do not directly apply to life settlement transactions, many fiduciary advisors are voluntarily applying the spirit of the new standards when it comes to recommending strategies to optimize and monetize the liquidity value of obsolete or burdensome life insurance policies.
Once your client decides to pursue a life settlement, it’s important to partner with an experienced life settlement broker.
Life settlement brokers have a fiduciary duty (per state laws) to represent the best interests of the policy seller in the secondary market. The broker shops the policy to multiple buyers, receives competitive bids, and negotiates the highest possible settlement offer. The brokering process ensures that the client can sell their policy with confidence, knowing they left no money on the table.
What should you look for when choosing a life settlement broker?
Negotiating with secondary market buyers requires skill and knowledge of each provider’s purchasing parameters. Look for brokers who have market longevity, a track record of brokered transactions in terms of dollar value sold, adherence to industry best practices, and licensure in states that require it.
Asset Life Settlements has the experience, credentials and track record to negotiate the highest possible settlement for your client’s policy. If you have questions or would like to receive a free policy appraisal for your client’s policy, please contact us at 1-855-768-9085.