7 Ways the Law Protects Seniors Who Sell Their Life Insurance Policies
I never get tired of sharing this fact: a life insurance policy is an asset. If a senior is not going to keep their life insurance policy—for whatever reason—they have a protected property right to sell that policy. In many cases, they’ll receive significantly more than if they simply lapsed or surrendered their policy back to the issuing insurance company. Just like a house or a car, life insurance policies can be a hidden treasure that can result in the senior receiving as much as 10 times more than the policy’s cash surrender value. Many seniors use the proceeds they got from the sale of a policy to fund retirement or pay for long-term care needs.
Yet many seniors don’t take advantage of this opportunity. Why? Because they don’t know it exists or, too often, the financial professionals who advise them—CPAs, wealth managers, estate attorneys, etc.—don’t know about it, either. Secondly, even when they are aware, they don’t understand it.
As such, I’ve dedicated much of my career to promoting the life insurance secondary market and dispelling the myths surrounding this valuable asset class. Over the past 15 years, I’ve worked diligently to create a market that makes selling a life insurance policy one of the safest and secure financial services available to seniors today. Over the past decade, the life insurance secondary market – also known as life settlements – has promoted an unprecedented nationwide set of laws and regulations that protect seniors who sell their policies.
Read on, because these standards matter—perhaps more than anything—when it comes to creating financial options for seniors.
It’s generally accepted that seniors are particularly vulnerable to misguided financial advice. Every advisor I know has a horror story to share about a client who was scammed or swindled out of a significant portion of his or her hard-earned assets. In fact, The Stanford Center on Longevity and the Financial Industry Regulatory Authority's Investor Education Foundation recently reported that seniors over 65 are 34% more likely to lose money on a financial scam than people in their 40s. The good news is that the situation isn’t going unnoticed. Private organizations such as AARP and The Investor Protection Trust, as well as federal and state government entities including the Consumer Financial Protection Bureau, are aggressively working to protect seniors and their nest eggs.
In addition, the Life Insurance Settlement Association (LISA) has led the way in introducing and implementing consumer protections designed to inform and protect seniors so they can easily and safely access the market value for an unwanted, unneeded or unaffordable life insurance policy.
From educating sellers to informing beneficiaries to ensuring policies are being sold to the best possible advantage of the policyholder, the following Top 7 standards provide confidence to seniors and financial professionals that exploring the sale of a policy can be the right choice.
Selling a policy is a highly transparent transaction.
Prior to the sale of a policy, the seller receives numerous consumer disclosures. In most states, this includes all offers, the gross vs. net amount of the offer, sales commissions, comparisons of sale price versus the policy surrender value and accelerated death benefit amount, names of purchasers, and more. They say sunlight is the best antiseptic.
When considering selling a policy, sellers are advised of alternatives to selling it.
Imagine this: you’re trading in your old car at a dealership, and the dealer tells you about all the ways to NOT sell your vehicle. Licensed buyers of life insurance policies are required (in the majority of states) to do essentially that for someone selling their policy: Life settlement companies are required to provide sellers with information about keeping their policies in force, including disclosing that an accelerated death benefit or policy loan might be a better option. In addition, in most states, settlement offers disclose the settlement amount as compared to any accelerated death benefit that might be available under the policy. It’s definitely a seller’s market.
Sellers also receive disclosures of certain risks when selling a policy.
While in most cases the financial benefits of selling a policy far outweigh surrendering it back to the insurance company, there are certain risks that must be disclosed, including tax consequences, a reduction in government benefits due to increased assets (usually a good problem to have!), or creditor debt reducing the net value of the transaction. As a financial professional, your guidance will be needed to assess each risk.
Sizing up Strategic Beta
Interest in strategic beta ETFs is rising. A few simple guidelines can help investors pick from among the often-bewildering number of options.
The number of strategic beta ETFs has grown at 20% a year, consistently in good markets and bad, since the year 2000. With good reason: Strategic beta ETFs offer a more thoughtful passive option than cap-weighted indexes—and they can do so with a more transparent process and lower fees than actively managed funds.
Bright future, dim past
All well and good, but how should investors assess any particular strategic beta ETF? Close to 40% of these funds have been in operation for less than three years. This lack of an established track record can make it hard to validate their claims. ETF sponsors may try to make up for that shortcoming with back testing, running simulations of holdings they might have had against actual past market performance, but that has its limitations:
Back testing doesn’t always account for fees, liquidity or transaction costs.
Back tests are “selection biased”—that is, back testers have a tendency (conscious or not) to engineer positive outcomes. Live outcomes are therefore likely to be inferior.
Too great a focus on recent history can lead to “driving in the rearview mirror.” While an index or ETF may solve the problems of yesterday well, an investor’s focus should instead be on solving the potential problems of tomorrow.
Three steps to an informed judgment
Because the indexes tracked by strategic beta ETFs are by design somewhat exotic, effective assessment of them calls for some digging:
- Investors first have to understand who the index designer and asset manager are (they may not be the same people). They should have a clearly expressed investment philosophy and the expertise to enact it in practice.
- The properties of the portfolio should reflect the investment philosophy. Not only does the transparency of ETFs allows examination of the holdings to ensure that this is the case, it also measures such as active share relative to a cap-weighted benchmark or turnover can indicate whether an ETF is performing as designed.
- Performance can also be used to confirm that an index is doing its job. While short-term results shouldn’t be given too much sway, the index designer should be able to explain when and why an index will perform and when it might not.
One key aspect of performance shared with traditional passive management is tracking error. Like earlier cap-weighted index tracking funds, strategic beta ETFs should have minimal tracking error to their own indexes. Beware, though, the tracking error to the benchmark can be large and dynamic, it is by this differentiation that strategic beta adds value.
Made to measure
Strategic beta does not defy analysis, despite its novelty. Indeed, it has a lasting advantage over standard active manager due diligence. Strategic beta, after all, is rules-based. What an investor sees in straightforward, well thought-out index composition rules is what the investor will get. In that sense, strategic beta is relatively immune to the personnel changes, style drift and index hugging that can challenge actively managed mutual funds.
Learn more about ETF due diligence here.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be a recommendation for any specific investment product, strategy, plan feature or other purpose. Any examples used are generic, hypothetical and for illustration purposes only. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor’s own situation.
Opinions and statements of market trends that are based on current market conditions constitute our judgment and are subject to change without notice. These views described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Past performance is no guarantee of future results. Investment returns and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. ETF shares are bought and sold throughout the day on an exchange at market price (not NAV) through a brokerage account, and are not individually redeemed from the fund. Shares may only be redeemed directly from a fund by Authorized Participants, in very large creation/redemption units. For all products, brokerage commissions will reduce returns.
J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. J.P. Morgan Exchange-Traded Funds are distributed by SEI Investments Distribution Co, One Freedom Valley Dr., Oaks, PA 19456, which is not affiliated with JPMorgan Chase & Co. or any of its affiliates.
For additional disclosure
For a longer discussion, please see our recent publication Strategic Beta’s due diligence dilemma (J.P. Morgan, April 2017).
- 1 of 1397