A Program on Advisor Life Settlements in the Advanced Markets

A brokerage general agency (BGA) plans to offer a program on life settlements designed exclusively for agents whose clientele tends to be high-net-worth individuals, closely-held businesses, charities and so forth. These agents also work with the full range of professional advisors, fiduciaries and financial services professionals who serve that clientele.

Life settlements are an integral part of the BGA’s business and play an important role in the BGA’s strategic plan for growth in the advanced markets. That’s largely for two reasons. First, a lot of large policies have lost their “raison d’être” and, with it, the support of those who bought them. Whether purchased for estate liquidity that’s no longer needed, trapped in hopelessly underwater split-dollar or premium financing arrangements, funding executive benefit plans that no longer provide benefits or are sitting on the books of charities now more concerned about the policies’ carrying costs than the once impressive return on the death benefit, these policies might be prime candidates for life settlement. Second, life settlements are an area where agents can help estate planners, tax advisors and other types of advisors expand their services to clients. There’s a lot of interesting counseling and planning associated with the transaction, and those advisors would like to be more involved.

There are various ways for the BGA to help its agents capitalize on the opportunity. This program is the BGA’s first step in a process of taking its life settlement platform up a notch or two to enable agents to work with the concept more effectively in the upscale markets. As they’ve done in the past with other initiatives, the BGA asks its top agents for input. The agents, in turn, put together a small task force that will draft a suggested syllabus for the program.

The Task Force Convenes

The agent who’s agreed to serve as the moderator and recording secretary of the task force starts the call with a question, “We all know about life settlements, and we’ve sat through more than our share of presentations on the subject. But now we have to up our game because the same old, same old isn’t helping us advance the plot in cases in which we have to present the concept to smart, analytical advisors, committees, boards, centers of influence and other gatekeepers who have to sign off on the sale before the policyholder will move forward. And they won’t sign off until we bring them up to speed on the concept and illuminate their particular role in the presentation, implementation and management of that concept. So, I’m asking you guys to take off the filters and tell me what you think the program should cover. Remember, it’s not just one presentation. They said it’ll be a series.”

And with that, the members of the task force chime in. What follows is from the task force moderator’s notes:

Paradigm Shift Needed

“I’ll tell you why I’m excited about this program”, says an agent. “I recently talked with a prominent estate planner and center of influence. Cutting to the chase, she said, ’I’ve listened to you and others on life settlements, let alone countless other topics. As far as I’m concerned, you guys keep making the same mistakes, though somehow expecting a different and better outcome. You’re talking to people who, frankly, don’t know what you’re talking about, in a language they don’t understand. You talk at them about the value of life settlements to their clients, but you don’t talk to them about its role in their respective practices. You state conclusions about why a policy is no longer supportable and should be sold. But you don’t present the evidence for that in terms they can understand, and if they don’t understand it, it’s dead on arrival. Your materials and presentations are often technically incomplete or imprecise, leaving the advisors wondering if you really know what you’re talking about or will touch all the bases in your work. And the topics that are most important to us are somehow always beyond the scope of your materials or presentations. By the way, you could absolutely make some of the same points about us, but right now, I’m talking about you.”

That agent continues, “We need to shift the paradigm because we’re clearly not reaching them. We’re not connecting. And it’s not just about dialogue. It’s about dialect. You know what I’m saying?”

Program Structure

The moderator should be the individual who runs the life settlement department at the BGA. The panel should be a couple of agents recognized for their presentation skills, success in the advanced markets, experience with life settlements and, of course, the willingness to talk about something other than their own success. The panel should also include a subject matter expert for the topic of that particular program. That might be a representative of a life settlement company, an attorney or a tax advisor.

The program materials should include specimen copies of all standard communications and forms issued in the process. We’d also like to have specimen copies of all tax forms issued in the process. The moderator and panel should refer to these forms as they go along. Incidentally, the person(s) in our offices who work in this area should be able to attend.

Overview of the Current Market

The BGA should bring us up to date on the current guidelines and practices for determining the feasibility of a life settlement and the terms of an offer. This update will help us recognize an opportunity when we see it and start a conversation. Here are the main points to cover in the update:

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• The insured. The latest on the art and science of life expectancy reports and whatever else determines this aspect of a life settlement’s feasibility.
• The policy. Is it marketable? Are there any developments with respect to the type of product that buyers will purchase or the condition of the policies? What illustrations and supporting information are buyers requesting? The flip side of these questions is what illustrations and supporting material/information we should be able to show an inquiring (and skeptical) third-party that the policy was properly and objectively represented in an analysis of continuity versus sale.
• The carrier. Ratings obviously, but what else?
• The planning context. Is there anything in the current environment that would change the standard questions we ask the insured or other policyholder about the need for the policy, the willingness to maintain it, etc.? Do we have a template that sets out those questions and makes sure we don’t miss anything, especially anything a plaintiff’s lawyer would wonder why we didn’t ask?
• The offers. What’s going on in the capital markets that would affect this business? Where’s the range of offers these days?
• The backdrop. What’s the latest on the marketing and technical backdrop for life settlements of key person policies, policies owned by charities, qualified plans, etc.

Life Settlement Companies

Why has our BGA chosen to work with the life settlement companies they work with (versus their competitors)?

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• What do they bring to the table?
• How do they help us? How do they protect us?
• How does the BGA monitor the quality of their work, their responsiveness, their transparency, the competitiveness of the offers they obtain and other important aspects of their service delivery?

The Process

Putting all of the above together, walk us through the life settlement process, covering who does what and all the procedural and technical detail that you think we and our associates need to know to navigate the whole process smoothly and efficiently. Refer to those forms noted above as you walk us through the process.

The Presentation Template

We suggest that it would be mutually beneficial for us and the BGA to have a customizable, compliance-approved template for presenting offers and providing support for policyholders’ informed decisions. The template, which the panel could present as part of the program, should cover:

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• The process. This version of the process should recognize that those listening to the presentation have only so much attention span for “process,” are anxious to get to the bottom line and, as we were reminded, don’t speak our language. This more streamlined, “jargon-lite” version of the process should enable us to get the essential information out on the table quickly and efficiently without compromising compliance.
• The offer. If there’s any one thing we’re concerned about being second-guessed at, it’s this. So, we’ll need to provide empirical support for the competitiveness of the offer. As advisors become more informed about life settlements and get involved with more transactions, their inquiries and due care about the underpinnings of offers will only become more substantive.
• Decision support. The more quantitative type of clients and advisors will want to run their own analysis to compare the economics and risks associated with keeping and supporting the policy versus selling it. We should offer resources for them to do that.

Tax Implications, Calculations and Reporting

The presentation template should have a segment on the taxation of the life settlement. How much to cover in that segment is open for discussion. But in terms of this program, we have some suggestions.

We’re not tax advisors, and we certainly don’t want to drift out of our lane. However, in these kinds of cases, advisors want to take the conversation beyond the current tax guidance of Revenue Ruling 2009-13 and the Tax Cuts and Jobs Act to address the tax reporting and compliance aspects of settlements as well as the associated planning and cash flow issues. And if we can’t go there with them, cases can get bogged down.

We’ve already noted that the program should cover tax forms and reporting. But it would also help to hear about some of the key technical concepts and constructs advisors work with and the associated terminology. For example, what if the selling policyholder is an irrevocable life insurance trust (ILIT) that’s a grantor trust? Or isn’t a grantor trust. What if the seller is a charity? Or a corporation disposing of an unwanted key-person policy? What about a qualified plan? Beyond that, the sale of a policy that’s subject to a split-dollar or premium financing plan can have its own implications. Charlie Ratner wrote about that in “How Trustees Should Incorporate Life Settlements in ILIT Reviews.”

The more familiar we are with the advisors’ concepts, constructs and terminology, the more resourceful we can be in getting them the information and support they need. And that will help us move cases along more smoothly.

Marketing and Networking

We’d like to leverage what we learn in this program for use in introductory, “lunch and learn” type presentations to the following groups and types of advisors. While there would obviously be a standard core of material for all sessions, there are discrete topics and points of interest to each group. Looking at each group in turn, what are the topics and points that they would absolutely expect to hear discussed? Maybe you could even create scenarios for role plays with these role players.

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• Estate-planning attorneys;
• CPA/tax advisors;
• Investment advisors;
• Trustees;
• Company CFOs, tax directors and others likely to be involved in these cases;
• Same as above for charitable organizations; and
• Spiritual advisors…only kidding.