Who is your client listening to? No different than other markets, there are companies trying to disintermediate fiduciaries and planners. They are aggressively advertising direct to your clients about receiving cash for their life insurance policy. If they’re successful in their quest, then your clients could be left without representation, vulnerable, and not treated in good faith.
Here’s what they could expect to hear. They promise your client something called “fair value”. It’s a subtle play on words with huge implications that could mislead your unsuspecting client into thinking they will get a good result. By communicating directly with your client, this strategy can be very profitable for them, not necessarily the client. Consequences can be long-term such as compromising the client’s existing financial plan and even introducing new products and services that aren’t suitable. The client is misled because they really think that they are getting a “fair value” because they received more than the cash surrender value, and as a bonus, eliminated intermediary fees. What could be better? Truth be known, they could have left as much as 800% or more of additional value on the table because they were dealing with a source that has a fiduciary responsibility to the fund they represent, not the consumer. If you were selling your house, would you like one offer or multiple offers to drive up the amount to your family? The same is relevant to selling your life insurance policy.
An additional downside for the client is not being duly represented. If a client were involved in a real estate transaction, they would hire a real estate broker or real estate attorney. The same process is true for many other transactions. Why would this be different? It’s always important to have an advocate on your team that knows where the potential landmines are located and the value can be identified. That’s why an experienced and independent life settlement brokerage firm becomes involved. This process can be complex. It’s critical to have a partner that has stood the test of time and can navigate the settlement process, saving the client time and money.
How do you protect yourself and your clients from this potential misrepresentation and misalignment? Here are few key questions to ask:
1. Is the broker or provider purchasing this policy for their own portfolio?
2. Do they have a fiduciary duty to the purchaser or to the client?
If the answer to either one of these first to questions is yes, then your clients’ need you to step in and represent them. The offer they would receive without your intervention would be heavily in favor of the buyer and not in your clients’ best interest. Also make sure the buyer is telling you the truth by asking them to respond in writing with these direct questions:
a. Will they rep and warrant that they do not have any ownership interest in the purchase of the policy?
b. Will they rep and warrant that they have no stake in the firm buying the policy?
3. Are they using the term “fair value” or fair market value? If they tell you that they obtain fair market value, then MAKE THEM PROVE IT! Ask the following questions:
a. Are they seeking multiple bids from several different institutional buyers? If not, then your client may not get what they deserve and could potentially be leaving as much as 800% or more of additional value on the table.
b. Are they being transparent? Will they provide a list of regulated licensed buyers and detailed bids? If they can’t or won’t do this, then that’s a big red flag.
Fiduciaries and planners that follow life settlement best practices always use an independent full service life settlement broker to design the case and manage a competitive bidding process that results in their clients receiving fair market value. Then, and only then are the best interests of your clients being served.
If your client is in a position where you think it would be prudent to consider alternatives, talk to a secondary market specialist. You can also go to https://ashargroup.com/policy-value-questionnaire/ to take the first steps in determining if a policy may qualify for a life settlement.