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Most of us have seen the commercials on TV. A happy couple in their 60s talking about how they have a life insurance policy they no longer need. In these situations the owner of a life insurance policy may elect to sell his or her interest in the policy to a third party in exchange for a lump sum payment during the insured’s lifetime. The sale of the life insurance policy is known as a life settlement.
If a policyholder is suffering from a terminal illness and has a life expectancy of 2 years or less, the individual may enter into a contract known as viatical settlement. The sale of a variable life insurance policy is considered to be the sale of a security and is regulated by both FINRA and the SEC. The buyer of the policy agrees to make all future premium payments and will be entitled to receive the payment of the death benefit upon the death of the insured.
The market for life insurance policies is illiquid, and pricing of policies can vary greatly. FINRA requires any firm that assists in the selling of client policies obtain multiple bids for the policy to ensure that the client receives a fair price. The firm may not enter into any arrangement that would require the firm to sell all or substantially all of its client life insurance policies to any one buyer. FINRA requires agents assisting in the sale of life settlements, as well as the supervisors of the agents, to receive training relating to life settlements. FINRA further requires that the training be documented for each agent and supervisor.