Life Settlements: Letters of Competency
Issue No. 130, June 27, 2023
Life Settlements: Letters of Competency
First, what is a letter of competency? While specific forms vary, it is a statement from a physician certifying that a person (usually, but not always, a senior) is capable of making their own rational and informed decisions about their health care, finances and estate. Typically, it is requested from a primary care physician who has been seeing the client for some time.
Although the legal and medical definitions of competency might not be identical, such a letter can be an important piece of evidence in any proceeding in which the competency of an individual is an issue. Most commonly this would be in a will contest or in a proceeding to have a conservatorship established.
A letter of competency can be most useful in a hostile family situation where decisions are being made that can disinherit or severely diminish the inheritance of a family member. A letter may be obtained on the client’s ownrequest or on the recommendation of the client’s estate planning lawyer, aslack of competency is a common assertion in contested estates.
Like the writing of a will or the creation of a trust, a life settlement is a significant estate planning event, which, additionally, involves a senior. Similarly, a life settlement concerns a life insurance policy that may represent a substantial portion of an insured’s estate. Like a contested estate,theoretically, the life settlement transaction could be challenged based on the competency of the insured/seller.
As a result, life settlement investors require a letter of competency on a form they provide, which will offer them some protection should the validity of the sale of the policy be challenged based on the capacity of the insured/seller. In addition to protecting the investors, a letter of competency can provide comfort to the insured/seller that they have the mental fitness to make this important decision. Finally, other participants in the transaction, like the client’s agent and other advisors, can also benefit from having a letter of competency as part of the closing package.
Life settlements are highly regulated transactions in the vast majority of states. A letter of competency is just another way to assure all parties involved in the transaction that the insured/seller has the wherewithal to make rational financial decisions.
Robin S. Weinberger, CLU, ChFC, CLTC
(617) 451-3343
Peter N. Katz, JD, CLU, ChFC, RICP®
(860) 937-2936
Ria J. Johnson, CFP®
(619) 920-4000
Rob Haynie
(954) 599-4433
