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Key Points in This Section

  • A life settlement is suitable only when the client’s current financial needs genuinely outweigh the future interests of the policy’s beneficiaries
  • Before recommending a settlement, agents must assess the client’s financial situation, health status, alternatives to settlement, and the impact on dependents and beneficiaries
  • A settlement should generally be a last resort after other options — policy loans, accelerated death benefits, reduced paid-up insurance — have been considered and found inadequate
  • Agents must never discourage a settlement to protect their own commission income from an ongoing policy — doing so places the agent’s interest ahead of the client’s
  • Florida law requires brokers to present all offers received to the viator — not just the highest or the one the broker prefers
  • Viators should always be encouraged to consult an independent attorney and tax advisor before executing any settlement contract

Suitability

When Is a Settlement Suitable?

The threshold question in any settlement recommendation is whether the transaction is in the client’s best interest. Because a life settlement permanently transfers the policy’s death benefit away from the original beneficiaries, it is a decision with irreversible consequences for the client’s family or other dependents. Suitability requires that the agent or broker carefully weigh the client’s current financial needs against those future interests.

A settlement is most clearly suitable when:

  • The insured is terminally or seriously ill and needs immediate funds for medical care or living expenses
  • The original purpose for purchasing the policy no longer exists and the proceeds can be redeployed more effectively
  • The policyowner can no longer afford the premiums and would otherwise allow the policy to lapse — receiving nothing
  • The proceeds will be used to purchase coverage or financial products better suited to the client’s current situation (e.g., long-term care insurance, an immediate annuity)
  • The beneficiaries are financially independent and do not rely on the death benefit

Factors to Evaluate

Before recommending or facilitating a settlement, agents and brokers should thoroughly evaluate the following:

Financial Situation What are the client’s current income, assets, and liabilities? Are there other liquid assets available to meet the stated need? A settlement should rarely be the first option considered.
Health Status What is the insured’s life expectancy? Has the health condition been verified by a physician? Is the condition likely to improve, stabilize, or worsen? These factors affect both suitability and pricing.
Alternatives to Settlement Has the client considered all available alternatives? Policy loans, accelerated death benefits (if available), premium waivers, reduced paid-up options, and extended term insurance should all be evaluated before proceeding to a settlement.
Impact on Beneficiaries Who are the current beneficiaries, and do they depend on the anticipated death benefit? If a spouse, minor children, or other dependents rely on the policy, the settlement may not be suitable regardless of the viator’s immediate financial needs.
Tax Consequences What are the tax consequences of the settlement? Senior settlement proceeds are generally partially taxable. Has the client consulted a qualified tax advisor? (Tax treatment is covered in Chapter 6.)
Government Benefit Eligibility Could settlement proceeds affect the client’s eligibility for Medicaid or other means-tested government benefits? A lump-sum settlement could disqualify a client who would otherwise have qualified for Medicaid-funded long-term care.

Settlement as a Last Resort

Experienced practitioners generally treat a life settlement as a last resort rather than a first option. Before recommending a settlement, agents should ensure the client has fully explored:

  • Policy loans — most permanent policies allow borrowing against cash value at favorable rates, with no required repayment schedule
  • Accelerated death benefits — many modern policies include provisions that allow terminally or chronically ill insureds to access a portion of the death benefit while still living
  • Reduced paid-up insurance — the policy is converted to a smaller paid-up policy requiring no further premiums, preserving some death benefit for heirs
  • Extended term insurance — cash value is used to purchase paid-up term coverage for the full face amount for a limited period
  • Premium waivers — if the insured qualifies as disabled under the policy’s waiver of premium rider, premiums may be waived without surrendering the policy

Only after these alternatives have been considered and found inadequate should a settlement be recommended. This approach not only serves the client’s best interest but also protects the agent from claims of inappropriate advice.

The Agent’s Own Interest

A recurring ethical issue in the settlement market is the conflict between an agent’s interest in preserving ongoing commissions from an in-force policy and the client’s potential interest in selling that policy. An agent who discourages a client from exploring a settlement — when a settlement would clearly serve the client’s best interest — is placing personal financial interest ahead of the client’s. This is a violation of the agent’s duty of loyalty and, in some contexts, may constitute a breach of fiduciary duty.

Florida law: Florida law requires viatical settlement brokers to present all offers received from settlement providers to the viator. A broker who withholds offers — whether to steer the viator toward a preferred provider or for any other reason — violates state law and the broker’s fiduciary duty to the viator. Brokers must also disclose all compensation arrangements, including the percentage of the settlement amount that constitutes their fee.

Encouraging Independent Advice

Given the complexity and finality of a settlement transaction, agents and brokers should always encourage viators to:

  • Consult an independent attorney before executing any settlement contract — particularly to review the terms, understand the implications of the beneficiary change, and assess any legal issues specific to the viator’s circumstances
  • Consult a qualified tax advisor to understand the tax consequences of the settlement proceeds
  • Discuss the decision with family members or other trusted advisors who can provide perspective on the impact on beneficiaries
  • Take full advantage of the 15-day rescission period provided by Florida law to reconsider the decision after contract execution
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