In a first-of-its-kind announcement on the topic of life settlements, the Financial Industry Regulatory Authority recently released a set of guidelines aimed at consumers that define the agency’s stance on selling unwanted life insurance policies in the secondary market.
As the regulatory body responsible for supervising the securities trading activities of broker-dealers, FINRA’s guidance is welcome news to many of us in the industry.
Although the regulation of traditional life settlement transactions (which comprise the bulk of policies sold in the secondary market) fall under the purview of the states, transactions involving variable life policies are considered securities and therefore come under FINRA’s watch.
Here’s our take on why FINRA’s announcement is noteworthy:
- It affirmed the efficacy and legality of life settlements, thereby establishing greater confidence in the market for seniors looking to sell unwanted policies.
- It advised policy sellers to “shop around” to get the best price and spotlighted the role of life settlement brokers who have a fiduciary duty to protect the policy seller’s best interests.
- It addressed (albeit implicitly) any hesitancy on the part of broker-dealers that may still be in the process of shaping their best practices or compliance procedures for recommending the option to clients.
In short, we view FINRA’s action as yet another step forward in shaping the trajectory of a maturing marketplace that has been driven for more than 20 years by the financial needs of retired seniors.
Looking Back
During the early stages, participants in the secondary market consisted of (1) a handful of providers who served as policy acquisition agents for institutional investors; (2) dozens of experienced life settlement brokers who negotiated the highest offer for the policy seller; and, (3) thousands of life insurance agents who sourced the majority of policies sold in the marketplace.
Based on our experience as life settlement brokers dating back to the early 2000s, very few broker-dealers, CFPs, estate attorneys, CPAs and other fiduciary professionals embraced life settlements as a solution for their clients. Consequently, the bulk of all transactions originated with life insurance agents whose clients were dead-set on getting the most value for their unwanted policies.
To the early adopters in this emerging market, there was little doubt that selling an unwanted life insurance policy for five to six times its cash surrender value (versus lapse or surrender) was in the policy seller’s best interest. These early market participants never imagined that, twenty years later, the phrase “serving the client’s best interest” would be top-of-mind for financial professionals throughout the financial services industry.
Changing Attitudes/A Major Turning Point
The turning point for many financial professionals—especially fiduciaries and members of self-regulatory organizations such as FINRA, FPA, AICPA, etc.—began emerging in the aftermath of the 2008 financial crisis. Due to enactment of the Wall Street consumer protection reforms in 2010, the financial services industry gradually adopted a series of laws and regulations that became a game-changer for the industry.
Although the regulation of traditional life settlements was not directly impacted by the federal reforms, the new initiatives transformed the mind-set and the manner in which most financial and insurance professionals interacted with their clients.
One of the most significant consumer reforms occurred in 2020 with the enactment of SEC Reg. BI—known as “Regulation Best Interest.” The rule states that broker-dealers have a fiduciary obligation to recommend only products that are in their customers’ best interest. Since its enactment, financial professionals who fall under SEC’s watch have been on high alert to comply with its mandate.
Fiduciary Obligation of Life Settlement Brokers
We consider it noteworthy that SEC’s “best interest” rule closely parallels the state licensing requirement for life settlement brokers.
Life settlement brokers are mandated by most state regulations to represent the policy seller’s “best interests” and to fulfill their fiduciary duty by negotiating the highest possible offer. (It is important to note that life settlement providers (buyers) who purchase policies are not held to that same fiduciary standard.)
Considering the spirit of the consumer-focused reforms mentioned above, it’s possible that, in certain situations, financial professionals could face a potential liability risk for not disclosing the life settlement option as the best possible solution for the client—especially for policies about to lapse.
Fast Forward to 2023
Today, selling an unwanted policy is widely embraced by most financial professionals as a prudent strategy for unwanted policies.
Unlike 20 years ago when many fiduciary professionals viewed the secondary market with skepticism, we are now routinely transacting life settlement cases submitted from a combination of professional advisors, including insurance advisors, financial professionals, estate attorneys, CFPs, CPAs, broker-dealers, trustees and trust officers.
While the change in mind-set took several decades to shape, we believe the regulatory landscape that emerged has provided an even stronger foundation to serve the needs of senior consumers burdened by premium payments for unwanted policies.
Key Takeaways
As we enter the final quarter of 2023, it is clear that life settlements have earned a seat at the table as an effective wealth optimization strategy utilized by most financial professionals and fiduciaries.
While FINRA’s recently published guidelines were targeted to the consumer audience, we believe their reach is broad and will serve to elevate the confidence level of broker-dealers and other financial professionals who may have been hesitant to embrace the solution.
Finally, FINRA’s guidance helped spotlight the important role of life settlement brokers in selling a policy for the highest possible offer. After all, it’s their fiduciary duty to do so.
