Why the Term ‘Fiduciary Duty’ Has Relevance When Selling Your Life Insurance Policy

Fiduciary Duty
29Aug '17

Why the Term ‘Fiduciary Duty’ Has Relevance When Selling Your Life Insurance Policy

The term “fiduciary duty” has gained broader awareness over the past few years because of the U. S. Department of Labor’s new rule requiring financial advisors to act as “fiduciaries” when advising clients on products or services relating to retirement investments. In simple terms, when a financial professional has a fiduciary duty to a client, it means the advisor is putting their client’s best interests first.

If you are considering selling your life insurance policy in the secondary market, we recommend that you choose a life settlement company that adheres to the fiduciary standard.

This article explains the roles of the various entities involved in the life settlement transaction process and clarifies which entities follow the fiduciary standard, and which entities do not.

 A Look Back on the History of the Life Settlement Transaction Process

When the secondary market for life insurance emerged in the late 1990s, the typical process involved three primary entities – insurance advisors, life settlement brokers, and life settlement providers.

The process began once the policy owner (following a consultation with his/her insurance advisor) decided to sell his/her policy. The insurance advisor, acting on behalf of the client, would then contact a life settlement broker who facilitated the underwriting and application process before brokering the transaction in the secondary market to multiple prospective buyers in pursuit of the highest possible purchasing price. These institutional buyers were known as providers.

The Marketplace Today

As a result of the Internet, TV and electronic media, today more seniors are aware that the secondary market for life settlement may be an option for cashing out on an unwanted policy. Over the past few years, policy sellers responding to TV ads began working directly with life settlement providers, known in the industry as “selling direct.” However, this process bypasses the critical role of the settlement brokers and even the policy seller’s insurance advisor.

Based on inquiries we receive at Trust Life Settlements, it’s clear that some seniors and their family members are confused about whether they should be working with a life settlement broker, or whether they’ll do just as well by accepting a single offer cash payment directly from a life settlement provider.

Again, it goes back to the question of which entity (brokers vs. providers) has a fiduciary duty to represent the best interests of the policy owner.

Life Settlement Brokers Have a Fiduciary Duty to the Policy Seller

Licensed life settlement brokers, especially those operating in the state of Florida, “owe a fiduciary duty to the policy seller to act according to the seller’s instructions and in the best interests of the seller.”

The primary function of the settlement broker is to submit the seller’s policy to multiple funding sources (providers) to create a bidding competition in pursuit of the highest offer. Each provider has its own purchasing guidelines which drive the price they are willing to pay.

In the typical life settlement transaction, the broker will shop a policy to multiple providers. Depending on the state in which the policy seller resides, this could involve 10 or more providers, and the broker might receive, on average, two to four bids.

When a life settlement broker shops the policy with the goal of achieving the highest bid, the broker is demonstrating a fiduciary duty to the policy seller. The broker’s mere involvement on behalf of the policy seller signifies to the marketplace that there is a competitive rivalry for the purchase of the policy, which often motivates providers to outbid each other. This is exactly what the policy owner would want to happen.

And finally, at the conclusion of the transaction, the broker who represented the policy owner receives a commission which must be disclosed by law to the policy seller. However, the provider’s compensation is built into the transaction, and the law does not require that they disclose the amount to the policy seller.

Life Settlement Providers Do Not Have a Fiduciary Duty to the Policy Seller

The primary role of a life settlement provider is to function as a purchasing conduit for their institutional investors (money sources) who are seeking to acquire policies for inclusion in their investment portfolios. Each provider will typically have two-to-four institutional money sources, and each money source will have different investment horizons which drive the price that the providers are willing to pay for each policy.

When a provider purchases a policy from the insured, the policy owner is compensated with a lump sum cash payment. The provider who purchased the policy agrees to assume all future premium payments until the policy matures (death of the insured). In representing the best interests of their investors, providers are seeking to purchase policies as cheaply as possible. Policies with lower annual premiums and minimal loans are often more attractive to providers than policies that are more costly to maintain.

What You Should Do

In sum, settlement brokers have a fiduciary duty and responsibility to the policy seller, whereas providers have a duty to their institutional money sources.

Also, providers are not bound by the same licensing and fiduciary standards as brokers, and they are not bound by any transparency guidelines to disclose their compensation to the policy seller.

If you are considering selling your policy, it’s important to understand the distinction between “brokers” and “providers.” We hope this article provides that clarity and why the term “fiduciary duty” is important as it relates to life settlement transactions. If you want to be assured that you receive the highest possible cash offer for your policy, you’ll want to use a licensed life settlement broker instead of selling your policy “direct” to one provider.

At Trust Life Settlements, we prefer to work with life settlement companies who adhere to the fiduciary standard. Feel free to call us at 800-216-2153 with any questions you might have about this article or the services we can offer you.

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