and Life Settlements: Due Care, Competence, and Objectivity
Ronald M. Roth
over five years, the life settlement marketplace has grown
from an out-of-the-mainstream cottage industry into its own
industry. Life settlements are now embraced by many wealth-management
and estate-planning professionals. CPAs licensed to conduct
life settlement transactions for high-net-worth seniors seeking
an exit strategy from unwanted policies will find that the
AICPA Code of Conduct will guide them in terms of due care,
competence, and objectivity.
life settlement is the sale of a life insurance policy by
a senior for an amount greater than the cash surrender value.
The proceeds are often used to purchase other financial
products. This option may appeal to people with changing
insurance needs. Most insurance policies are purchased for
a particular reason. For example, a policy on the life of
the head of a household may have been purchased as an income
replacement vehicle; a policy on a key person in a closely
held business may have been purchased to ensure the company’s
survival following such a person’s death; or a policy
may have been purchased solely as an investment vehicle.
change, however, and an insurance policy may become obsolete
for a variety of reasons:
head of the household accumulates enough wealth to be
The key-person policy is no longer necessary because the
business matures to the point where its fortunes no longer
depend on any one person.
premiums on the investment policy become so expensive
that funding it is no longer economically feasible.
a policyholder may believe that the benefits from selling
an in-force policy outweigh the need to keep the policy.
For example, a life settlement can remove the policy from
the taxable estate (avoiding application of the three-year
rule under IRC section 2035) in order to transfer additional
assets tax-free to descendents. Alternatively, a policyholder
may use the proceeds of a sale to do the following:
Replace property that was donated to a charity;
Pay for the costs of health care;
Purchase long-term care insurance;
Replace a single-life policy with a joint and survivor
Pay gift tax on lifetime gifts;
a more efficient, more affordable policy.
Care, Competence, and Objectivity
to the AICPA Code of Professional Conduct, a distinguishing
mark of a profession is acceptance of its responsibility
to the public. CPAs hold that due care requires them to
discharge professional responsibilities with competence
and diligence. The maintenance of competence requires a
commitment to learning and professional improvement that
must continue throughout a member’s professional life.
CPAs involved with senior clients have a responsibility
to learn about how life settlements can achieve clients’
financial objectives and the risks they present.
advisors should keep the best interests of the client in
mind. For example, if a 75-year-old individual plans to
let a $1 million policy lapse because the premium payments
are too expensive and the reason for the coverage no longer
exists, the financial planner should inform the client that
a life settlement might be a better option, including the
option to donate the proceeds to charity to offset the tax
M. Roth, CLU, ChFC, is the managing partner of the
National Organization for Business Development (NOBD), a consulting
firm based in New York City. He can be reached at 888-330-4010