Alfie and Zoey are in their mid-70s. They’d describe their overall health as “not so great,” depending on which one you ask and on which day. Today, they’re calling their life insurance agent to talk about what to do with a couple of policies. Specifically, they’re calling to discuss life settlements.
Alfie and Zoey have seen and heard a lot about life settlements in the past year. They even know a couple of people who sold their policies. A friend of theirs in the financial services business sent them some articles on life settlements by a guy named Ratner, including “Questions Advisors Should Ask About Life Settlement Proposals” though their friend acknowledged that the articles aren’t written for the consumer. He also sent them articles or blurbs from various sources that address some of the dynamics of and the tectonically competitive forces within the life settlement business.
Interestingly, neither their attorney nor their tax advisor could tell them much about life settlements. Their investment advisor said she’s familiar with the concept and, you guessed it, had read an article from Ratner that told her what she should do for them if they’re going to get serious about exploring a life settlement.
Agent Proposes a Novel Approach
Their agent isn’t the individual who sold them the policies. Rather, she took over from the original agent. Though she’s now servicing the policies, she really doesn’t know Alfie and Zoey at all. To her credit, she’s offered to meet with them to talk about the policies and the associated planning. They initially declined her offers to meet because they always thought they had a good handle on things. Not anymore, or at least not about what to do with the policies at this juncture. This is definitely higher math! And it certainly couldn’t hurt to talk to a professional about this type of planning at this stage of the game.
Fortunately, their agent has been involved in a couple of life settlements. But she tells them that she wouldn’t be working with the same life settlement company this time around. Long story, she said, but it came down to what she referred to as a “lack of transparency” that put her in a difficult position with her clients. So, she’s done some due diligence on a couple of other companies. The agent would ordinarily speak with these companies herself and then report back to the client. But this time, the agent offers a novel approach and invites Alfie and Zoey to join her in a conversation with each company to choose which one they’d like to work with, if at all. This way, Alfie and Zoey can hear from the companies directly, have a chance to ask their own questions and hear how well the companies respond. Of course, that’ll also make it easier for Alfie, Zoey and the agent to regroup after the calls and compare the companies’ respective services and pricing. The agent’s idea is especially appealing to Zoey, whose corporate background included writing requests for proposal for and then interviewing consultants.
Before they get to life settlements, the agent says that they should thoroughly understand their current policies, how they’re performing today and where they’re headed on both a “guaranteed and current assumption basis” as applicable to the respective policies. The agent notes that both policies were issued at the best underwriting classification by companies that were, and still are, highly rated. Any potential life settlement buyers will take favorable note of that as well.
Zoey’s term policy. This policy has three more years of level premiums, after which the premiums do their best impression of a space shot. The policy is also convertible without medical evidence at any time during those three remaining years. In fact, they recall that the agent at that time told them that the conversion features were among the most favorable in the industry, but they don’t recall why. What Alfie and Zoey haven’t seen until now are illustrations of any of the permanent policies that would be available to Zoey on conversion. The agent calls these the “conversion illustrations,” nearly all of which gave Zoey and Alfie a case of sticker shock. But in fairness, they weren’t really all that surprised given Zoey’s age. Also in fairness, they don’t care, because they bought the policy to cover a single, significant need that’s long gone. If they could get some cash for that policy now, they’d take it.
Alfie’s universal life policy. This policy was always intended to be permanent, in large part due to the fact that Zoey’s survivor benefit from Alfie’s pension would be half of his current pension and the income from Social Security would be reduced as well. But they’ve run the numbers and are comfortable that Zoey wouldn’t need the coverage if Alfie predeceased her. All things considered, they’d be happy to get a nice offer for the policy so they could invest the after-tax proceeds as well as the yearly sum now going to premiums. But giving up this coverage, even at a nice profit, is a big step that they won’t be able to retrace. So, they’ve asked the agent to help them challenge their thinking and their numbers. The most recent statement from the insurance company says that as long as Alfie pays the premium he’s paying now, the policy will stay in force for another 12 years under “current assumptions,” a term they currently assume Alfie understands.
The agent takes them through a series of what she called “iterations” and then what she called “sub-iterations.” The iterations and their progeny allowed them to see the premium that would be needed to support the full death benefit (or a lower death benefit) to certain ages under various assumptions. This was an interesting exercise, because the agent worked with some pretty elaborate life expectancy calculators to give them an idea of what age to “plug into” the illustrations under the iterations. What’s more, they know that the agent would work with their investment and tax advisors to run whatever numbers they should to compare the after-tax results of selling and investing the net proceeds versus keeping the policy.
The agent directs them to the life settlement companies’ websites so that they could see who they are and so forth. Those sites also had some helpful resources that began to give them an idea of how marketable their policies might be.
The agent fashions a comprehensive but still efficient set of topics/questions for their conversations with the life settlement companies. She shares the list with Alfie and Zoey and asks them to add any questions that they’d especially like the companies to address.
Alfie and Zoey do, in fact, have a few questions, some of which were second nature to Zoey based on her background. Other questions were inspired by an off-hand conversation with their realtor. While he doesn’t know the difference between a life settlement and a peanut butter sandwich, the realtor knows a lot about listing and selling a valuable asset and the kind of questions to ask someone before engaging them to do that for you.
Alfie and Zoey suggest that the agent add these items to the list, noting that she’d no doubt rephrase their phrasing into proper industry parlance and practice and reorder their points in more logical sequence within the larger list:
- We’ll have already asked for samples of all documents generated in the process. In particular, we’d like our attorney to review any contractual documents.
- Will the company share with us any life expectancy reports they get? The reports could be helpful as we challenge our thinking about selling and losing the coverage.
- Will the company share the details of all offers?
- We’d like to know upfront and with specificity all fees, charges, commissions and compensation paid to the company or anyone else in connection with the sale of a policy. Like with a house closing, we want to see the detail of all charges whatsoever that bring our proceeds down from gross to net. In fact, we should see a sample of the form(s) they provide with that information.
- Assume that sometime before the sale, we decide that we don’t want to sell a policy or we become unhappy with the company’s service for any reason and ask that the company halt the process. What happens? What fees or charges do we incur? Are we free thereafter to work with another life settlement company, or does the company claim an “exclusive” on the sale of the policy? If so, for how long and under what terms?
- We assume that the buyer of the term policy will convert it to a permanent policy. How does that work? Are we informed of the transaction? Who gets the commission? How and when is that commission reflected in the economics of our sale?
- Each company we talk to should know that we’re also talking with another life settlement company. The company should tell us why we should work with them and one of their competitors.
Alfie and Zoey are comfortable that these questions will nicely supplement those from Ratner’s articles. And they’re also comfortable that they’ll be collaborating with the agent on the interviews, talking with her about what they heard and how they felt and knowing they’ll have a trusted advisor throughout the process.