5 pitfalls to avoid when assisting clients with a life settlement

Mar 7, 2017 3:20:00 PM / by Darwin Bayston, CFA

5_pitfalls_to_avoid_when_assisting_Clients_With_life_settlmentsThere is a peculiar paradox in the financial advisory world: Ninety percent of seniors who lapsed a life insurance policy would have considered a life settlement had they been aware of the possibility. Yet 65 percent of financial advisors have never recommended a life settlement to a client, but claim they would do so under the right circumstances.

Unfortunately, each year more than $100 billion face value of life insurance lapses by seniors over the age of 65, mostly from a lack of knowledge that an unneeded or unaffordable policy may be sold. A life settlement is a strategy for helping your client capture some of those benefits rather than forfeiting them back to the insurance companies.

Based on conversations with hundreds of financial advisors and life settlement industry professionals, I believe a key explanation for this disconnect is that most financial advisors simply lack enough information about how to evaluate a life insurance policy as an asset in their clients’ portfolios. Like all other assets, these policies have a strategic purpose in addition to costs and benefits, and can be sold by the client if the asset is no longer serving its purpose.

Here are five common pitfalls that have been known to ensnare professional financial advisors when working with their clients on possible life settlement transactions:

5. Promising the moon

Most advisors instinctively understand the importance of giving their clients untarnished information about potential outcomes with financial planning strategies so they can make objective and even-tempered decisions. Unfortunately, in their excitement over the possibility of helping their clients uncover a hidden asset, some advisors make the mistake of promising them the moon — only to end up disappointed if the policy isn’t worth as much in the secondary market as they hoped. Strive to under-promise and over-deliver, rather than the other way around.

4. Turning a blind eye to premiums

If premium payments aren’t kept current on a life insurance policy, its value will already be diminished before you even begin to investigate the secondary market. In fact, many insurance companies won’t even bother to verify coverage, let alone process a change in ownership, if the policies are delinquent. Moreover, if your client ultimately chooses to sell their policy, it will be their responsibility to continue making premium payments until the policy ownership has officially changed.

The takeaway: Don’t turn a blind eye to premiums.

This blog was originally published on LifeHealthPro. To continue reading the blog please click here

Darwin Bayston, CFA

Written by Darwin Bayston, CFA

Darwin Bayston is President and CEO of the Life Insurance Settlement Association (LISA). His charge is to extend the outreach of the Association to all participants of the life settlement industry from consumers to capital providers, including producers, brokers, providers and service providers who are part of the life settlement market. He was previously Managing Director of Life Settlement Consulting & Management (LSCM), founded in 2004 and specialized in life settlement policy and portfolio valuations, and life expectancy analysis. He has published several articles and participated as speaker at a number of life settlement conferences. Previous to that he operated an investment advisory firm. From 1980 to 1993, he served in several capacities, including President and CEO the CFA Institute (and its predecessor organizations). While at CFA, he founded the continuing education program, was editor of the CFA Digest and supervised research projects funded by the Research Foundation of the ICFA. He began his career as an investment analyst with a Midwest life insurance company. Mr. Bayston has been Chairman of the Martha Jefferson Hospital Foundation ($100 million), a member of the Hospital’s Finance Committee and a past member of the Board of the Institute for Quantitative Research and Finance (Q Group).