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Free money for the wealthy. Liquidity for the underpriviledged. (Part 11 of 11)
Sunday September 16, 2007 12:00AM | Click here to visit original article.
So what do you do if you have already been talked into a life settlement and then were talked into buying replacement insurance? You should talk with an attorney to determine whether the original sale made sense, and whether your life insurance agent fully explained to you that it might have made more financial sense to continue to fund the policy than to sell it. You should also talk to your attorney about whether your life insurance agent explained to you that the cost of insurance might be higher with a replacement policy because you have aged. And if you are being approached to do this transaction, you should find an attorney who is knowledgeable about it to help you to review whether it is right for you. Life settlements are now being pitched as "free money" for wealthy people, but in reality they should only be used by people who no longer have the liquidity to keep their policies in effect. For everybody else, the sale of the policy is probably unsuitable and the advice to sell it will often be wrong. Those considering entering into a transaction to "grow" a life insurance policy for later sale should consider their risks of later liability to investors if the policy is successfully challenged, and demand indemnification and hold harmless agreements from the investors. Also, they should carefully consider who might end up holding their policies, and perhaps attempt to limit the investors in their policies to strictly institutional investors. We expect that regulators will soon jump into the life settlements markets, as the National Association of Insurance Commissioners (NAIC) and various state securities regulators have started looking into the issue. As noted, the NASD has stated that it already considers life settlements to be a security and thus subject to suitability analysis. Eventually, too, interests rates will rise thus making the rates of return on life settlements less attractive to investors. All this will cause an eventual shake-out of the life settlements business, thus hopefully returning it to its meaningful core function which is to provide an alternative method for seniors who cannot afford to keep their policies up to gets some additional cash out of them. In the meantime, seniors should be wary of deals that offer them quick profits for simply allowing life insurance to be placed on their lives. They should not allow themselves to be rushed into such arrangements, but instead should take the time to carefully analyze what it is they are doing, and whether they would be better off simply buying the life insurance themselves and holding it, instead of committing themselves to selling it off after two years. Insurance agents and financial planners should also be wary of these deals, and the potential for later being subject to discipline for advocating an arrangement which was unsuitable for their clients and subjected them to lost opportunity when their client later discovers that he would have been better off holding on to the life insurance as his estate's own best investment. Particularly where replacement insurance will be used, insurance agents and planners should be very careful that they explain that the true cost of insurance for the new policy will likely be higher than if their client had simply continued to fund the original policy. It is not too difficult to envision lawsuits after the death of the senior where the family finds out that the senior had a huge amount of life insurance, but they were not beneficiaries. ---Source: http://www.quatloos.com/life_settlement-life_settlements.htm |
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