Insurance Industry Must Work on “Quality of Life” Products

The insurance industry is a sweeping part of our culture that impacts many aspects of our lives, both personal and professional. But, rather than try to grade the entire industry, I would like to focus my “mid-year grading report” on recent trends in the area of life settlements.

The industry has had an opportunity in 2006 to contribute to our “quality of life” through improved protection products. However, it has a ways to go. Therefore, the industry gets a “C+” for the first half of 2006.

The insurance industry has always been an excellent provider of protection products, serving our population well and flourishing as a result. Now, the good news is we are living longer, sometimes outliving our need for our death protection products. For many, the option of having cash to maintain a quality of life is preferred.

With that said, the life settlements arena or secondary market has become a very viable way for those clients who no longer have a need or beneficiary for their life insurance to convert their death benefits into a living benefit, one that they can enjoy, or more importantly, use to provide life’s necessities.

While life settlements are not for everyone, they do promote the process of receiving fair market value for a life insurance policy that the policyholder wishes to sell. However, the insurance industry has been resistant to this concept.

As seasoned financial advisors know, each situation must be carefully analyzed to be sure it is in the best interest of the policy holder. Also, there are legal and tax issues that vary from state-to-state that add complexity to the concept.

However, we also recognize that this is not the way insurance companies intended policies to be handled when they were first issued. It was never anticipated that “fair market value” might become part of the pricing equation.

Is it fair to expect a new homebuyer to purchase a house for $100,000 and then 20 years later, when that home is no longer needed or wanted, to be required to sell it back for the same price of $100,000? By giving clients the option to sell their policies, they can convert their death proceeds into living benefits better used for issues such as long-term care, etc.
So, the whole concept of life settlements options begs the question, “Why is it not a good thing to assist a client in this way?”

So far, the insurance industry has been successful in discouraging the life settlements practice. Using the idea that this marketplace potentially yields itself to litigious situations, insurance companies have been cautious about supporting these transactions.

However, our contention is that the opposite might be true: a potentially litigious situation exists if we do NOT propose life settlement. When a life settlement transaction is available to a client who could potentially sell his or her policy that is about to lapse, and we do not advise them accordingly, that family might be better positioned to sue due to negligence on our part.

In his testimony before the NAIC Life Insurance and Annuities (A) Committee, LISA Board President M. Bryan Freeman said, “Life settlements have been recognized by virtually every legislative and regulatory body in the United States, by the NAIC, by the National Council of Insurance Legislators and, recently, by the Financial Accounting Standards Board, as creating more value for life insurance consumers than is available from the

insurance carriers themselves. It would be a serious mistake and harmful to consumers if regulators chose to limit a life insurance policyholders’ financial options.”

Life settlements is a train that is not going to stop moving forward. It’s time for the industry to embrace it and allow its brokers and agents the right to use this option to help others. The second half of 2006 is a good time to start.

Michael K. O’Malley is managing partner, O’Malley & Associates, in Downers Grove. Contact him at 630-964-6700

Source: The Business Ledger - Business Newspaper for Suburban Chicago