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Questions Advisors Should Ask About Life Settlement Proposals

The discourse has to move on from marketing platitudes to practical guidance for policyholders and their advisors.

In previous articles, including “Life Insurance Policy Themes for 2023,” I suggested that if the life insurance discourse, which I broadly defined in that article, were to move on from the “why to buy” to the “how to buy,” there’d be more buying. Similarly, the life settlement discourse, also broadly defined, might want to consider the same suggestion. That means less talk about why to sell a policy and more about how to sell it. Emphasis on the latter, especially emphasis on the role that both the agents and the clients’ advisors play in these transactions, could prove to be, well, transformative.

As part of my contribution to this expansion of the discourse, I wrote “A Program on Life Settlements for Agents in the Advanced Markets.” I’ll now follow that article with a set of questions that advisors should ask life insurance agents who propose a life settlement and, conversely, agents should be prepared to answer or, in a different setting, use in a presentation on life settlements. Either way, these are points that I believe are noticeably absent from today’s discourse, which, in turn, keeps the discourse in marketing mode versus a much needed advisory mode.

A Common Setting

You’re an estate planner with a wealthy clientele. You get a call from a client’s long-time investment advisor, who wants to conference you in with the client’s tax advisor. The topic is life settlements. Apparently, the client had a conversation with a life insurance agent about selling a large policy. This isn’t the agent who sold the policy. He’s a successor, whom the client really doesn’t know all that well. Anyway, the client has asked the investment advisor to collaborate with you and the tax advisor to talk with the agent. “Check this thing out,” instructed the client, “Do some high level reconnaissance and get back to me.”

The Advisors Confer

The client told the investment advisor that, while intrigued with the possibility of unloading his “inexplicable universal life” policy, he has a lot of questions about life settlements in general, how this agent would handle the transaction and, of course, whether in the cold light of day he should sell the policy or figure out how to retain it. While he’d like his advisors to work as a team, he’d prefer that one of the three be the primary contact with the agent and, if things get that far, help him make an informed decision. That “point person” would also keep the trustee of the client’s irrevocable life insurance trust (ILIT) in the loop, as the trustee would actually be the seller. Anyway, with a wry smile that can’t be detected on the conference call, the investment advisor tells you that she and the tax advisor have nominated you to be that point person. No wonder they didn’t do a video call!

You know the other advisors well, mainly because you’ve worked with them on this client and others for years. So, the conversation flows nicely, with each offering plenty of suggestions for what should be on a list of questions that you’ll ask the agent on a call or at a meeting. As you’ve apparently also been nominated as the group’s scrivener, you’re tasked with putting together a draft of the list and circulating it for comment by these advisors and the trustee of the ILIT.

The First Draft

It takes only a couple of days to do the draft, circulate it and get comments back. Here’s the current version of what you’ll ask the agent, “conversationally annotated” for now until you finalize the questions:

  • Bear in mind that the three of us aren’t in your business and have limited familiarity with life settlements and the associated practices, procedures and terminology. So, you’ll have to adjust the tempo and tenor of your responses accordingly. In other words, be patient with us.
  • We obviously assume that you’re fully licensed and credentialed in the life insurance business. Are you licensed to do life settlements? If not, why not? Just curious.
  • What life settlement companies do you work with for a policy like the one our client’s ILIT owns? Why do you work with them? What is it about their platform, process, personnel, resources, communication, technology, support and results that distinguishes them from their competition?
  • We’d also like to know which firms provide the life expectancy reports to your life settlement companies.
  • If you work with more than one life settlement company, how do you choose which company to engage for a particular policyholder or policy?
  • How many life settlement cases have you handled all the way through? What are the largest policies you've put through the process? How many of those policies were owned by ILITs? How many of those ILITs had independent corporate trustees?
  • At this juncture, the client is just interesting in learning if the policy is marketable, what kind of offer he might expect, etc. Will he incur any cost or obligation associated with this exploratory process?
  • Walk us through the steps and time frame of a typical life settlement transaction from start to finish.
    • Generally speaking, what are the criteria and parameters that buyers consider these days when making (or not making) offers?
  • We assume that not all situations go full course to a sale. What are some of the reasons that the process doesn’t get to fruition?
  • We’ll talk further about this, but for now, how would you describe the role of the clients’ various advisors in these transactions? What about trustees?
  • Let’s talk about your role in the life settlement process. Assume that a policyholder has indicated at least some reluctance to maintain a policy. Assume further that, for sake of conversation, it appears that both the insured and the policy suggest that there’s at least a basis for discussion about life settlement.
    • How do you “tee up” the life settlement conversation? Assume first that the policyholder says they don’t think they need the policy anymore. Then assume the issue isn’t need, it’s cost or affordability. In each case, what questions do you ask the policyholder? What steps do you take and what resources do you employ to help the policyholder come to an informed conclusion on “need”? On affordability?
    • Once the process is underway, how do you act as the policyholder’s advocate in the transaction? What value do you add in the process? Do you monitor the process and challenge something that doesn’t seem fair or correct? Give us some examples of where and how you interceded on behalf of the policyholder and/or got a policyholder a “better deal” than what was originally offered.
    • How would you prove that the offer presented by the life settlement company was as good (or better) as any that might be in the offing?
    • How do you communicate with and support a policyholder’s advisors? Please give examples, including any resources you provide that help the policyholder’s tax and investment advisors work with you on a “keep vs. sell” analysis on an after-tax, after-fees basis.
    • What special information or services, if any, have you found to be helpful to corporate trustee policyholders who are considering a settlement or evaluating an offer?
    • How can we be helpful to you in the course of the transaction? For starters, would it be productive for us to set up a conversation among the client, you and the three of us where you could cover a lot of these points?

Practical Guidance Needed

As I’ve tried to make clear in previous articles, life settlements can be an integral component of many clients’ planning, as well as many agents’ business models. But the discourse has to move on from marketing platitudes to practical guidance for policyholders and their advisors. Hopefully, this modest contribution is an impetus for movement in the right direction.

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