Krasner Life Settlement and Premium Finance

By Matt Brady

 

The secondary market can provide advisors with an opportunity to help clients improve their insurance picture, and to re-emphasize the need for purchasing insurance in the first place, according to an estate attorney.

 

Speaking at the annual meeting of the Association for Advanced Life underwriting in Washington, Christopher Erblich a partner in the St. Louis, Mo. office of Husch, Blackwell Sanders, LLP, said that taking advantage of the secondary market can allow clients to purchase more coverage than they otherwise would, or replace older policies with newer, more efficient products.

The secondary market, he said, has created a “whole new exit strategy” for clients with split dollar policies or other policy needs.

 

In one instance, he pointed to a case in which a client was able to repay split dollar advances on two policies, obtain a new insurance policy and create a source of income to cover the premiums for the new policy through financial transactions that included funding provided by the sale of old policies.

Additionally, term policies can be used to help fund other insurance policies once they are sold on the secondary market, he noted.

 

“For so long, clients viewed a term policy as renting a death benefit,” he said, but that view is no longer necessarily the case.

 

As an example, he referred to a client who had a million estate and wanted to purchase a second-to-die policy. That same client could also purchase term coverage into the same trust, sell the term policy and dump the funds into the second to die policy, Erblich said, noting that “one of the ways you can pay for life insurance is with life insurance.”

 

Life insurance itself is constantly evolving, he continued. “Every time I turn around, the policies have become more efficient.” Using the secondary market can be an effective way of helping a client effectively update a policy by funding new coverage through the sale of an old policy, he said.

However, Erblich acknowledged that strategies such as this can lead to concerns that the transactions could be viewed as stranger originated life insurance, or STOLI, and he stressed that it is important for advisors to ensure their clients stay away from such schemes. 

 

Aside from the fact that such schemes are not as risk free as often presented, and generally involve most of the profits going to someone other than the policyholder, Erblich said advisors won’t want to have to explain themselves to clients once a major STOLI case hits the national news.

 

“There’s going to be, guaranteed, a very egregious case that hits the national press,” he said.

 

The answer to these problems, he said, is disclosure and transparency, to all the parties involved. “Don’t be afraid of disclosure,” he said. Policyholders should be told about the option presented by the secondary market, and advisors should not shy away from letting the carriers involved know that the secondary market will be included in a discussion of options with a client down the road, Erblich said.

 

When asked about his example involving purchase of a term policy to potentially fund another policy, he replied, “You tell the life insurance company the truth,” that the policy may be sold. “You tell them that you will talk about the option of the secondary market for life insurance,” he said “and you include a disclosure statement” in the paperwork affirming that part of the discussion.

 

The distinction, he said, is that an advisor should not to tell the client that they should sell the policy, but explain the option of doing so. “The truth is, you don’t know what their decision will be,” when the time comes to decide about selling the policy.

 

Perhaps one of the best tools the secondary market provides to advisors is support for convincing clients that they should be buying life insurance to begin with, he added. “You no longer have to struggle to prove” the value of life insurance policies, he said, because the very existence of a secondary market “proves it for you.”

 

In the past, he noted, there was only one buyer for life policies that were no longer wanted: the insurance company that issued them. 

 

Given the need to meet earnings expectations, and the assumptions made regarding lapse rates, Erblich said many insurers became “more aggressive” on pricing policies, offering lower premiums to potential policyholders. As that occurred, some people saw what was happening with viaticals (where the terminally ill sell their policies to fund their medical care) and realized that life insurance policies are worth more than insurance companies are willing to pay for them in surrender value, he said.

 “They’re not buying them for the color of the paper,” Erblich said. “If these secondary market people are buying policies, why shouldn’t your clients?”