Daily and other insurance analysts caution that often there is a real value to be gained for the seller by not selling, even for those policy owners who don't like paying the premiums. In a few years, the policy could be worth a lot more as life expectancy grows shorter. More important, if there is a good chance that the policy holder will die in that five years, there is a much better reward to beneficiaries (i.e., the family) in the form of the huge tax-free death benefit. (The family, after all, is not after a higher rate of return.) Meanwhile, if the sale is actually brokered, the brokers' commissions, underwriting charges and administrative costs will eat away at the value of that policy whenever it's being peddled in the secondary market. And that is not taking into account the taxes, since the amount paid over the base amount is taxed as ordinary income, which erodes the wealth, says Daily.
Caution
Though
Daily has broken down the rationality of the pricing process, the
negative headlines associated with the market have made some groups
wary. Besides the Larry King case, there have been accusations by the
states into cases of bid rigging and undisclosed payments by life
settlement firms to brokers to move business their way. As of last
year, Commonwealth is no longer processing life settlement agreements,
though its advisors can do the deals as an outside business activity.
D'Amato says that this decision was not made because of the product but
more because of the risk to advisors using them. Whether it is fair or
not, names of the advisors get in the papers when these deals go bad.
"We thought it was time to hold back, and we left the industry until it either regulates itself or has someone give clear guidelines," she says.