The following is the transcript of an interview with tax attorney Larry Brody. Brody focuses his practice on estate planning for high net worth individuals and the use of life insurance in estate and non-qualified deferred compensation planning. In addition, he serves as an adjunct professor at Washington University School of Law and a visiting adjunct professor at the University of Miami, School of Law.
In terms of life settlements, what is your experience and credentials?
I am a lawyer and I represent a number of clients, both locally and nationally, who either own or whose family members own policies on their lives. Occasionally, we talk to these individuals about the possible use of a life settlement for a policy that is no longer wanted or needed. I have also spent a fair amount of time looking at the tax issues related to life settlement sells from the seller’s point of view and I have given a number of speeches on that topics.
Currently, about 42 states have life settlement regulations. How does state regulation help the life settlement industry?
I think the general answer to that is that there were a number of abuses in the life settlement industry early on, and I think state regulation helps the compliant companies by keeping out the less ethical companies; and this is better for the consumer as well because they know that they’re dealing with a regulated company that is seemingly trustworthy.
Is the selling of life insurance policies illegal in states that aren’t regulated?
No. However, from the seller’s point of view when dealing with a company that isn’t regulated, you’re taking a huge risk.
How do you predict the life settlement industry will evolve over time?
I think it will be around because it provides a service that is much needed. I think it will continue to be a viable choice for people who, for lots of reasons, don’t want their policies. We’ve seen a fair uptick in the people who consider selling their policies because they may have been bought to help pay the federal estate tax at a time when the estate tax exception was $600,000 or $1 million, where it is now over $5 million per person. Now that a need for the policy no longer exists, they are prompted to sell it.
How did the downturn of the economy effect the life settlement industry?
During the recession, a lot of the entities that funded the purchases of insurance policies stopped providing funds for buyers because they lost so much money in the market. The cash flow of the buyers was minimized, and therefore the number of life settlement transactions diminished a great deal. However as the economy has started to improve, the number of life settlements has begun to rebound.
When does it make sense for a person to sell their life insurance policy? When does it not make sense?
I think the only time it makes sense to sell is when a person decides that they no longer want or need the insurance. Once that decision is made then there are two choices. You can surrender the policy to the insurance company who will give you the cash surrender value, or you can sell your policy through a life settlement firm if the life settlement buyer will pay you more than the cash value.
Typically older individuals with declining health benefit from selling their life insurance policies. So for young insureds or healthy insureds, life settlement is not an option. Life insurance companies, however, will allow anyone to surrender their policy for the cash surrender value, regardless of their age or health. Also, it doesn’t make sense to sell your life insurance policy if you are really, really sick. In this case, it might be better for your family to wait to collect the death benefit rather than obtaining a lesser amount through a settlement offer. Ultimately each insured’s case should be evaluated individually in order to determine what the best option may be.
If you are considering selling your life insurance policy, it is advisable to go through a life settlement broker. Life settlements brokers are highly trained and well versed with guidelines in the life settlement industry and can help individuals get the most out of their life insurance policy.