Recommending a life settlement to a financially strapped senior may be tempting to the agent who stands to make a hefty commission on the transaction. But the ethical thing to do is to first discuss the alternatives, including a sale of the client's life insurance policy to his or her kids.
This was one of a number of suggestions offered during a panel discussion held at the American College's Bryn Mawr, Pa.-based campus last month. The panelists, including executives from New York Life, Northwestern Mutual, Clark Consulting and Protective Life, offered perspectives on ethical issues bearing on compensation disclosure, the sale and marketing of annuities and life settlements.
The last of these drew the most critical comments. John O'Byrne, a chief conduct officer at New York Life, New York, observed that life settlements engender a "conflict of interest" in that the settlement company benefits financially by the insured's early death. Because of this conflict, O'Bryne said New York Life does not permit its agents to sell the solution.
Panelists cited other reasons for avoiding life settlements. Among them: the high commissions that agents can earn on the transaction; possibly adverse tax consequences for the insured; and the potentially negative impact for insurers and consumers over the long term.
Panelists noted that because settlement companies purchase life insurance policies for investment (rather than protection) purposes, the tax advantages long enjoyed by policyholders–tax-deferred growth of a policy's cash value and income tax-free distribution of death benefits–are at risk. Congress and state legislatures may decide that such advantages are no longer in the public interest, they said.
Ultimately, said John Johns, CEO of Protective Life, Birmingham, Ala., the growth of life settlements (a market valued by Conning Research and Consulting at $19 billion, up from $2 billion in 2002) could lead to higher premiums for clients. That's because insurers will have to factor into their premium rate calculations a lower percentage of policy lapses than that which the industry has traditionally enjoyed.
"Premium rates have assumed a historic pattern of policy lapses that have proved no longer to be true," said Johns. "The insurer suffers as a result. Longer-term, if [life settlements] become widespread, then companies will have to assume that their products will be sold into the secondary market, which will raise the cost of insurance to all consumers."
