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.
Cyborgs Are the Future for Advisors
Becoming cyborgs is the way to go for financial advisers…blending robotics and humans into one organism.
You see, I am convinced that robo-advice models will succeed and prosper.
I am also convinced that human advisers will succeed and prosper.
I am further convinced that some of each will fail entirely and die, but in Darwinian fashion the most adaptable will survive and prosper. Smart financial advisers will work out how to become cyborgs and build an offering which is a blend of human and machine – or at least their practice will.
Despite the fear-mongering when it comes to robo’s the reality is that there are many great arguments for automated transaction systems, or robotic product delivery. Cost reduction for the consumer, cost reduction for the practitioner….efficiency, speed, convenience for all….elimination of the frustrating and time consuming service model supplied by the industry to low value transactional customers….and let’s be bluntly honest: some people DO just need a product solution at some stages of their life, and DO NOT need holistic advice at some points.
Robo-advice makes sense commercially, and it can meet a need in life stages planning for many consumers. It also happens to appeal to a segment of society who are happy to make their own decisions and transact from the comfort of their pyjamas during the ads in their evening television program, and who are unlikely to engage in full advice. It is worth remembering that this last type of consumer segment is growing at the expense of the traditional intermediated product delivery systems of distribution.
However, machines do not “manage” relationships and behaviour – humans manage humans. Humans tend to rebel against the concept (or slightest inference actually) that they are being manipulated or are at the mercy of computers and machines. Machines and automated systems exist for our convenience, don’t they? Nobody wants a “SkyNet”.
……So the human adviser remains in the equation……
When we strip out all the industry jargon and hyperbole the primary function of a financial adviser is to manage clients behaviour. We don’t really manage their money – other people do the actual money management. We don’t supply products….we source them from a supplier. What we do is manage their behaviour and expectations. We coach them. Machines don’t do that yet….and when they are able to (and they will be), most consumers will shy away from being managed by a machine.
But we cannot escape those arguments supporting robo-offerings as they make too much sense for clients and for us. In fact I suspect robo-advice will be a very good thing for smart adviser practices.
Believe it or not, I believe robo-offerings can help us get clients.
For most consumers there is a period early in life when their financial advice needs are fairly basic, and also there is a period later in life where all the planning has been done and consumers are moving into “drawdown” territory. In between those times, life gets somewhat busier and complexity increases substantially.
Advice delivered by humans should be focussed upon the complexity phase. Apart from the fact that this is the period of a consumers life when there are the most variables to consider in their planning needs, it is also the phase where behaviour management is a distinct help to the achievement of the consumers goals and objectives. Generally people will only do uncomfortable or new things if they have a high degree of trust and confidence in the person guiding them to do so, and establishing that level of trust – or the bond between two people – is where robo-offerings will struggle to compete.
However, when it comes to identifying a fairly simple need which has a product solution then robo’s will certainly be able to deliver a solution more cost effectively and faster than the human adviser can, who is bound by increasing complexity of their own called “compliance” every time they have to interact with another human being.
The smart adviser will identify those areas of their clients lives and those product solutions which work well for those times and find a transactional solution for their clients to access. They will build that transactional, no-advice, solution into the service offering that their practice puts into the market. In other words they will embrace and incorporate robo-offerings into their business model.
Not just because consumers want them or need them, and not just because it is cost effective to do so. Not even because we’d like to have a commercial revenue stream which sidesteps the more time-consuming (and therefore labour intensive and expensive) compliance requirements.
The reason smart advisers will do it is because it will help gather the next generation of clients for the firm before the complexity triggers drive them to seek advice elsewhere.
The robo-advice solution caters to those who have an identifiable need for financial services of one sort or another, but who do not yet need holistic bespoke planning. It is an entry point for consumers to become customers of the firm, and for the firm to then work upon converting those transactional customers into advised clients for the future.
Robotics are a part of our world and our future. We need to figure out how to make them a part of our business too, but in such a way that our business uses the robo’s, rather than being used by them. Humans and robo’s integrated into the same service business in order to deliver they type of solutions and assistance that consumers and customers and clients want at different stages of their life.
The future for the financial advisory practice is cyborgs.
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