Servicing: What happens after a policy is sold?Article added by Larry Simon on November 11, 2009
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Once a policy is sold in the secondary market for life insurance, it has to be kept in-force in order for the purchaser to receive the death benefit. As a producer, you may think that once you've completed the transaction, your job is done, and the servicing is not your worry.
While that may be true from a tactical standpoint, a producer should have as much interest in servicing the policy once it's sold, as in the initial life settlement transaction. Proper servicing ensures that a policy stays in-force, and, by keeping the policy in-force, the writing agent helps to ensure a renewal commission stream. In addition, the agent improves the chances for a higher commission rate and bonus structure, due to lower lapse rates with the carrier. Further, the insured or an insured-appointed contact, which could be the agent, will be contacted periodically for life tracking purposes. A reputable servicing organization will contact the client or his/her representative in a professional and timely manner.
Throughout the financial turmoil over the last year, there have been a number of settlement portfolio owners who have experienced capital crunches, curtailing their ability to make ongoing premium payments and forcing distressed sale situations. The restrictive capital supply has also resulted in many institutional purchasers holding onto portfolios for longer terms than their originally planned time horizons. As a result, these portfolio owners have been faced with the need to properly service and maintain their life settlement assets without having the infrastructure or expertise in place to do so effectively. In several cases, this has resulted in either over-paying premiums or inadvertently allowing assets to enter grace periods. Other portfolio owners have unknowingly allowed policies to lapse and some likely have unclaimed benefits that they are entitled to receive. Some firms attempted to handle these services internally, while others didn't receive proper and effective servicing. This may eventually translate into real portfolio losses from additional costs and lost revenues.
Further complicating the situation in several cases was a lack of quality origination of the underlying assets or a sub-standard portfolio composition. In addition to premium optimization and policy servicing, experienced servicers and providers have received requests from several portfolio owners to assist in the evaluation and transaction of existing assets. During this process, many situations have been uncovered where either the quality of the origination was lacking or the portfolio construction was not optimal, or both, resulting in inconsistent and incomplete due diligence and enhanced concentration risks in the underlying portfolio. Ultimately, these factors may lead to a more difficult time selling the portfolio or reduce the price offered by willing buyers.
A comprehensive life settlement program can make the transaction process run more smoothly and efficiently. Prior to selling a policy, we recommend that you confirm that the buyer or provider is experienced with top tier processes for sourcing, originating, underwriting and servicing settlement cases.
Servicing and life tracking
Oftentimes, the provider for the policy purchase becomes master servicer for all policies acquired through life settlement transactions. As master servicer, it, in turn, may contract with the industry leader in life status tracking services as a special sub-servicer to perform certain tracking duties for the life settlement transaction. In other instances, when a portfolio of policies is acquired, the servicing is done by a separate third-party.
The cash flow in life settlement transactions is dependent upon the accurate tracking of insured individuals and the timely and efficient submission of death certificates to the insurance carriers. With these services, operational controls and independent systems should be available to ensure collections are received promptly.
Some of the policy servicing options include:
As part of its risk management controls, many providers have some sort of "life tracking" system that maintains separate tracking to independently monitor policy maturities and help ensure that the institutional investor receives timely payment of the policy benefits. The insured individual agrees to be monitored by the company, consenting to maintain periodic contact with the servicer, provider or a designated special sub-servicer (personally or through a designee).
- Custom reports
- Payment verification
- Mortality tracking
- Premium optimization
A variety of methods to accomplish this task are utilized (as permitted by law), including:
Life tracking typically includes use of sophisticated database-tracking systems.
- Monthly, quarterly, semi-annual or annual contacts with the insured, individual or a person designated by the insured for this purpose
- Monthly, quarterly, semi-annual or annual contracts with the insured's primary physician
- Quarterly, semi-annual or annual search on state information systems that report deaths listed by social security numbers
So long as notification of a maturity (death of insured) has not occurred, the funder's trustee or other designated disbursement agent will generally pay all required policy premiums. To assist the disbursement agent, the servicer will notify the paying agent regarding amounts and due dates of premium payments. The servicer should also provide premium payment reminder notices to the paying agent as a precautionary risk control measure. In addition, the servicer monitors the policies to ensure that the premium payments are, in fact, made in a timely fashion and obtains a confirmation from the insurance carrier verifying that payment was received and applied to the appropriate policy account.
Statutory and policy provisions require insurance companies to send written notice to the policy owner before coverage lapses due to non-payment of premiums. This provides another method of protection. The funder's trustee or fiduciary intermediary, as record owner of the life policies, receives such notices directly. The servicer will typically work directly with the portfolio owner's paying agent to make sure policy premiums are paid on time in amounts commensurate with maximizing the investor's return on the policy
When an insured individual dies, a request for a copy of the death certificate is made to the tracking designee, next of kin, or directly to the appropriate governmental agency. Death certificates are typically obtained in less than two weeks. Once the death certificate is obtained, a servicer will assist with preparation of a claim package to be submitted to the insurance company to request payment of the policy benefit proceeds. The claim package is executed by the record owner prior to submission to the insurer, and the servicer then monitors the collection status until the funder's designated beneficiary receives the policy proceeds.
Death benefit payment and reporting
Insurance companies have a requirement to pay death benefits promptly on policies, and many states impose interest charges and/or penalties on claims not paid on a timely basis. On average, the collection period is approximately four to six weeks from the date of the insurance carrier's receipt of the death certificate.
The servicer should retain a record of all policies purchased and should provide reports to the owners and their representatives on a monthly basis. The purchaser or its fiduciary representative acts as custodian of the policy originals.
The monthly investor reports may include, at the option of the investor:
The following reports are samples that are customarily provided to purchasers of life settlements. As in other areas, purchases of life settlements comes with many risks, including without limitation the following:
- Quantity, cost and face value of policies purchased, matured or rescinded
- Cash flow activity and roll forward balances at the beginning and end of the month
- Policy types and insurer data
- Average life expectancy of the pool and the distribution of the individual life expectancies
Prospective life settlement purchasers should consult with their individual legal, tax and financial advisors to discuss all of the risks of a life settlement purchase and determine whether life settlement purchases are suitable for their needs and level of risk tolerance.
- Longevity (i.e., the actual time between the purchase of the life settlement and the death of the insured, which may not coincide with the life expectancy projected at time of purchase.)
- The accuracy of the medical evaluation that determines the life expectancy projection at time of policy purchase.
- Claims-paying ability of certain carriers; however, LSS requires that the carriers have high ratings from recognized rating agencies.
- Low liquidity, since this asset class is not commonly traded in secondary and tertiary markets.
- Time to maturity (death of the insured), tied to the expected weighted average life expectancy within a typical portfolio.
We hope that you will now agree that it is important to understand the steps taken to keep the policy in-force and to communicate that information with your client. Ensuring that a policy is underwritten and sold to an originator with best industry practices will increase the likelihood of a smoother transaction process for all parties involved.
For more information on life settlement servicing, please contact me using the forum below.
Neither Life Settlement Solutions, Inc. nor its respective affiliates provides legal, accounting or tax advice. Nothing contained herein constitutes a recommendation to buy, sell or hold a life settlement, portfolio of life settlements, or any other asset or security.
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