As the life settlement industry continues to gain traction and greater acceptance among CPAs, wealth managers and other gatekeepers to the wealthy, the question often arises regarding how the privacy of the seller is protected once the policy is sold or even resold. 

In as much as more CPAs are being approached by their senior clients regarding the life settlement option, it is important that CPAs understand the mechanics of the secondary market (PDF). and the protections that are in place regarding the privacy of the seller.  Undoubtedly, this question will be asked by the senior policyholder, and the CPA will want to have a general understanding of this topic in order to be responsive to their client’s concerns.

The life settlement process typically begins with a senior and his/her financial professional evaluating the performance of a life insurance policy that was purchased for income replacement, or for the senior’s heirs to pay estate taxes upon their death.  But as is often the case, circumstances change over time, and the original purpose for which the policy was purchased may no longer be a factor.

In most cases, policyholders first learn about the life settlement option from their insurance agents. However, more recently seniors have begun to initiate the process after hearing about the product from their social network and others who have sold their policies.  Although most life settlement transactions originate through insurance agents (producers), today’s affluent seniors often have a team of professional advisors such as CPAs, wealth management professionals, attorneys, certified financial planners, and others to whom they turn for advice when considering a life settlement transaction.

Once the decision is made to pursue a life settlement, the CPA has a responsibility to guide the client in obtaining the highest possible value for this asset.  Working with a settlement broker whose core competency is negotiating the highest possible value in the secondary market for the senior’s policy should be the CPA’s next step.

When a policy is purchased by an institutional buyer, the insured’s medical records are maintained by a third-party servicing entity, sometimes referred to as an escrow agent.  These servicing agents or intermediaries are typically banks, trust companies, CPA firms and other companies who specialize in overseeing and monitoring portfolios within this type of asset class.  In accordance with this third-party vendor arrangement, each case is identified by a tracking or account number, which insulates the insured’s private information from the investors who purchased the policies.  Should the portfolio of policies be resold to another financing entity, the records of the insured individuals are generally maintained in a similar fashion by a third-party company whose role it is to oversee and maintain the insurance policies, and track the status of the insured until the policy matures.

I believe as CPAs gain a greater understanding of the dynamics of the marketplace, they will begin to feel more comfortable informing their senior clients that there is indeed an alternative to accepting low cash surrender values, or allowing policies to lapse.  In fact, some financial professionals believe they have a fiduciary duty to at least inform the client of the life settlement option.  Considering the fact that a senior over the age of 70 may have an opportunity to obtain three to five times the cash surrender value for an unneeded life insurance policy, it would seem prudent for the CPA to explore the possibly by asking a life settlement broker for a preliminary pricing analysis.

Scott Kirby is co-president of Advanced Settlements, Inc., one of the nation’s largest life settlement brokers.  Scott may be reached at 1-800-561-4148.