A Life Settlement Broker's Fiduciary Duty to the Policy Seller

Most retirees who are looking for an exit strategy from an unwanted life insurance policy have very limited knowledge of the secondary market or where to begin to sell it for the highest possible value.

That's why the majority of policy owners entrust a life settlement broker to lead them through the application process and to negotiate with market buyers to obtain the highest offer.

Because a life settlement broker derives his/her professional livelihood from earning a commission on the sale of the policy, the above scenario opens the door to temptation. It may create an ethical dilemma for those who may be a little too eager to broker the sales transaction.

Less responsible players in the market might be inclined to take advantage of an unsuspecting client by readily agreeing to represent the policy seller in the transaction ─ regardless of whether (in the long term) selling the policy is in the client's best interest.

At Asset Life Settlements, we believe a life settlement broker's obligation to the client extends far beyond the singular act of brokering the policy.

A broker's duty to the client also involves educating clients about the process, advising them as to whether a life settlement is the most suitable option, and providing insight as to whether it's in their best interest to accept a buyer's offer.

This article examines the fiduciary responsibilities of life settlement brokers and spotlights a recent case that tested our ethical resolve.

In the end, we decided to walk away from earning a commission because it was the right thing to do.

The Fiduciary Responsibility of Brokers

As value-added intermediaries, licensed life settlement brokers are required to execute their fiduciary obligation to policy sellers in accordance with state laws and regulations.

Most states have adopted similar language describing these duties, as paraphrased below:

"A life settlement broker works exclusively on behalf of a policy owner and, for a fee, commission, or other valuable consideration, offers or attempts to negotiate life settlement contracts between an owner and one or more life settlement providers.

"Notwithstanding the manner in which the life settlement broker is compensated, a life settlement broker is deemed to represent only the policy owner and not the insurer or the life settlement provider, and to 'owe a fiduciary duty to the policy owner' to act according to the policy owner's instructions and 'in the best interest of the policy owner.'"

While the focus of the preceding language primarily centers on the broker's fiduciary duties regarding the act of negotiating with potential buyers on behalf of the policy seller, we underscore the final phrase, which reads: "…to act … according to… the best interest of the policy owner."

We interpret the language "to act in the best interest of the policy owner" to also include: first, advising the client during the case intake process as to the suitability of a life settlement in achieving their objectives, and, second, advising the client whether it is in their best interest to accept or reject a buyer's offer.

Clients suffering from the financial stress of maintaining an unwanted policy may feel so compelled to sell the policy for an immediate payout that they overlook other options to achieve their ultimate financial goal.

During situations like this (and as illustrated in the case below), a life settlement broker should wear the advisor's cap and, if called for, recommend an alternative solution to selling the policy.

A Client's Need for Immediate Premium Relief

My firm was honored to help this medical physician achieve a successful outcome for an unwanted life insurance policy that had become a serious financial burden on his family.

During the case intake process, the physician explained that as part of his family's estate tax planning process over 25 years ago, the physician and his family bought an $870,000 insurance policy on the life of his then 74-year-old mother.

But as the years went by, the value of his mother's financial assets declined, and the insurance coverage was no longer needed for estate tax reasons.

Although the family had struggled over the years to make annual premium payments, it decided to keep the policy in force. It applied any cash buildup in the policy toward the annual premiums.

As of the present day, the premiums increased to $130,000 for the current year. The premiums were set to increase even higher in the following years.

Given the policy's escalating premiums, the physician faced what he believed to be a grim financial picture for him and his family.

His mother was now 97, and the policy was about to reach its maturity date with no extension rider beyond age 100.

The annual premium was coming due, and his family did not have the financial resources to pay it.

Considering the fact that his mother had a 22-month to 30-month life expectancy, the physician feared that once the policy contract expired, he and his family would essentially forfeit hundreds of thousands of dollars that they had invested in premium payments over the years.

The physician believed that selling the policy would be the best solution to help his family recoup at least a portion of its financial investment.

We explained to the physician at the outset of the case that few buyers would be willing to take the risk of purchasing a life insurance contract that might not pay a death benefit.

However, at the physician's request, our team immediately went to work to complete the underwriting process and submitted the case to 12 potential buyers in the secondary market.

Irrespective of the high premium payment coming due and the lack of a death benefit rider, we successfully negotiated two offers, the highest of which came in at $240,000.

We were surprised by receiving an offer that high, considering the risks that the buyer was taking.

Although the physician was excited about the offer and had initially accepted the bid for $240,000, we pointed out that this amount was a fraction of what the family had invested in the policy over the years.

Acting as an advisor instead of a broker, we went on to point out that, considering his mother's current failing health, it would make sense for the family not to sell the policy but to pool their financial resources and make the premium payment to keep the policy in good standing.

We knew that providing such guidance to the client would mean forgoing our broker's sales commission.

However, we were convinced it was the right thing to do, as it relates to the client's best interest.

At the time, the family reluctantly took our advice and managed to pay the upcoming premium to keep the policy in force. Four months later, the insured passed away.

Afterward, the physician and his family contacted us to express their gratitude for our recommendation that they keep the policy in force.

The beneficiaries received the policy's full death benefit of $870,000 — more than three times the $240,000 offer the family initially accepted.

Our Hat

While the act of brokering a policy (in other words: negotiating with market buyers to obtain the highest offer) is the primary function of a life settlement broker, most experienced brokers recognize that their duty to the client also extends to the advisory role.

When a life settlement broker is presented with an emotionally-charged case where a family is dealing with the possible loss of an elderly parent while also struggling with the financial challenge of maintaining a burdensome policy, such a situation may call for wearing an advisor's hat.

As second market advisors and brokers, we believe that wearing our advisor's hat is one of the most valuable services we provide at Asset Life Settlements. We welcome hearing from prospective policy sellers and their financial professionals.

Scott Thomas is co-founder and managing partner of Asset Life Settlements, a life settlement brokerage company based in Orlando, Florida. He can be reached at (888) 335-4769, extension 1115.