Not All in Industry Tell Owner Options
Omaha World-Herald, 9 November 2006
Sooner or later, someone will sue an insurance agent for not offering a life settlement as an option, veteran Omaha insurance man Robert Nelson says. And then that sued insurance agent's company will have to explain why it prohibits its agents from discussing life settlements, he said. Nelson said such settlements are a legitimate transaction for some people who have life insurance they no longer want or need. Nelson, vice president and manager of the life and estate planning division for the Grace-Mayer insurance agency in Omaha, said the insurance industry must adjust to life settlements as a part of the business. "If a consumer gets a larger amount, isn't that a good thing?" he asked."Perhaps the product and the asset are undervalued in the first place."
A life settlement is a transaction in which an insured person sells a life insurance policy to a third party, receiving a fraction of the death benefit of the policy. The buyer pays the premiums on the policy and collects the benefit when the person dies. The life settlement payment typically is much higher than the person would have received by surrendering the policy to the insurance company.
In recent years, the life settlement industry has grown more sophisticated, Nelson said, and now policyholders can learn the sale value of their policies according to formulas based on their age, the death benefit of the policy, the premium costs, their life expectancy and other factors. Yet some insurance companies tell their agents not to inform consumers about the possibility of a life settlement, because the companies would rather see such policies lapse or pay out the smaller cash value, Nelson said. Although people normally don't want financial institutions owning policies on their lives, the size of the life settlement payment makes a difference, he said. He recalled the case of a man who could no longer afford to pay premiums on a $900,000 insurance policy that carried no cash value. The man simply was going to stop paying premiums, but a life settlement brought him $350,000 in cash. "How would you feel if you found out about this six months later?" Nelson said. "Wouldn't you say, 'Shouldn't you have told me about this? I just lost a significant amount of money.'"
Although only a small number of policies qualify for life settlements, Nelson said consumers should check whether theirs would be eligible. He said he has examined some policies that didn't result in settlement offers. "The person can at least make the next decision with the peace of mind of having made an informed decision," he said.
Although there are possible abuses, he said, there also are many legitimate reasons for life settlements. A company might purchase an insurance policy on its top executive and then decide to sell it if he leaves the firm. A person might sell a policy on a spouse after a divorce. A person whose children are adults and out of college might sell a policy that was intended to ensure payment of college tuition. "It's not the dark, lurking predators trying to find unhealthy people and talk them out of their life insurance policy," he said. "It's getting accurate valuation on an under-priced product and letting the consumer benefit from it. This is a wonderful consumer option."
Nelson recommended that people discuss life settlements when they meet with their financial advisers.
"To withhold the idea that life settlements even exist, which is often the case out in the marketplace, to me that's the saddest part," he said.
Copyright (c) 2006, OmahaWorld-Herald, Neb.
Distributed by McClatchy-Tribune Business News.
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