Feature: How does disclosure of settlement options impact agents?

Ideally, the advisor who sold the policy and continues to work with the client would have discussed all the options long before, Akins says. But if the policy in question has been in force for several years, it is possible that the original agent will no longer be in the life insurance business or may no longer be alive, he says. "In that case, the customer would probably check around with two or three advisors in the community and pick one he or she likes to ask about what the options are."

Hopefully, the new advisor will be familiar with all the options and will explain them, Akins says.

The advisor's role is very important, he adds. It is unlikely that most policyholders could, upon reading their policy, understand the options available to them, he explains. "And if the contract is an older policy, it's likely that the contract would not even mention benefits acceleration." Nor do life policies mention life settlements.

The state laws regarding such disclosure by insurance companies are not identical, but none specifically spells out what the "available options" are, points out Maxson, the attorney.

"That means they do not say specifically that the policyholder should consider a life settlement. But they do say that, when certain triggers occur–such as, a policyholder submits a request to surrender the policy or accelerate its death benefit or when policy lapse is imminent–the insurer should notify the owner that alternatives may be available." The laws also call for the state insurance commissioner or other state official to develop a consumer document on policy owner rights that, among other things, "may include general descriptions of common products."

These laws are a "big step forward" from having no notification at all, Maxson says, especially since "most consumers don't know there are alternatives to surrender, death benefit acceleration and lapsing."

"I think it's a good law," says Akins, the financial planner, of the Oregon statute.

"It's a good back door check for the client–a nudge to go out and check out all the available options before making any change….

"It's also good for the agent, because if the client takes an action on a life policy but later learns of another option that would have been better, there will be a record that the client was notified, in advance, that other options may be available. That notice is a prompt to check around first."

The laws even say that. For instance, the Washington law says: "life insurance is a critical part of a broader financial plan. There are many options available, and you have the right to shop around and seek advice from different financial advisers in order to find the option best suited to your needs."

Pfeifer points out that, to date, there have been no lawsuits from customers who claim that the insurance company and agent did not tell them that the customer could get a better solution elsewhere.

But such litigation will come, he predicts. Absent prior notification, the insurance industry is looking at "a thriving litigation risk" involving what customers need to know to get maximum return on their transactions.

The new disclosure laws will help address this risk, Pfeifer says.

Note:

–The Washington disclosure provision appears in SB 5195 – 2009-10.

–The Oregon provision appears in SB 973, SECTION 22.

–The Maine provision appears in PL 2009, c. 376 but the Maine legislature is now considering amending it slightly under proposed bill, LD 1523.