Who Does a Life Settlement Broker Represent?
If you own a life insurance policy and the insured is age 70+, you may be thinking about selling your life insurance policy to a 3rd party investor.
If you're asking who a life settlement broker represents then you're already headed in the right direction. In short, the broker represents the seller in the marketplace. In this article I will explain the life settlement marketplace, why working with a life settlement broker is a good idea and how it can benefit you.
Before I get too deep into explaining the market, here's a recent real life example worth sharing. I recently I had a client with a $500k policy and a 5-7 year life expectancy. They tried getting their own offer by going direct to a buyer, and received one for $48k. Not satisfied, the seller found me to broker their case. The first offer I got for them was $150k, and eventually we settled at $250k. The buyer paid my commission on top of the $250k. There's no question the seller's direct offer was a low-ball offer because the buyer didn't face any competition. Brokering the case, we eventually got him 5 times his original offer amount. Was it worth it to hire a life settlement broker?
In a life settlement contract who does the life settlement broker represent?
Today, in order for a life settlement to be done legally, it must be done through a life settlement provider. A life settlement provider is the business entity that acts both as the legal contract provider, and also represents the buyer side of negotiations in the settlement. They often represent a handful of investor funds, and there are quite a few different life settlement providers in the marketplace, so you certainly want to have your case sent to more than one, and a broker can bring your case to many.
The life settlement providers also help their investors underwrite a case, decide whether or not to make an offer, and negotiate on their behalf. They want to find good investments for the funds they represent, and at the end of the day they also want to win cases but are ultimately limited by their investors' spending decisions.
A life settlement broker represents the seller's side, also known as the current owner of the policy. A broker's job is to educate clients and prepare their case for market. It's also their job to get your case in front of a large number of investors, negotiate on your behalf, and seek out the best offer. The life settlement marketplace is a fairly small community built largely on trust and relationships. An individual seller without representation will not have established either of these things even if they could figure out several buying groups.
Some investors have billions of dollars to buy and manage policies while others represent smaller funds including individual capital. Some buying groups are looking for larger policies where others are interested in smaller ones, and their motivation on any given case can vary depending on a multitude of factors at that time. Unless you are set up and have relationships with a wide variety of investors, you may be leaving a good amount of money on the table if you try the market by yourself.
We're your advocate, and we work for free until you decide to accept an offer.
The buyer pays our commission at the close of escrow, and generally speaking the more money we can get you, the more we're compensated, so it's in our best interest to get you the most we can for your policy.
A life settlement is the legal sale of an existing life insurance policy (typically of seniors) for more than its cash surrender value, but less than its net death benefit, to a third party investor. (2)
Going back to the investor side, they're not only trying to find opportunities for their clients, but also trying to get a good deal for them too. When they make their initial offer it is rarely their highest, and sometimes they also want to see what other offers come in first before they make their bid.
For someone that only receives one offer, it may sound great to the seller who is about to lapse their policy and any kind of offer is helpful, but how will they know if they got a good deal unless they shopped it around to a wide variety of buying groups?
To give you an example, we'll bring a case to market and the first offer will be $50k, but we eventually find another group that's willing to pay $140k for the same policy. The same story can be applied to many cases we've worked on, and a lot of times when a policy is a borderline investment, or too risky, most groups will pass without making any offer, but eventually we do find one or two groups willing to buy it. If they hadn't worked with us they would not have gotten anything at all.
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Who Does the Life Settlement Broker Represent?
After we've gone through the negotiation and bidding process, if you decide to accept an offer we go into the contract phase. The life settlement provider will be putting the contract together and sending it to the life settlement broker, who will then share it with the seller.
The broker can help explain certain aspects of the contract to their client, and if the client has revision requests, the broker will communicate that to the provider and ensure all parties are satisfied. The broker will also help to keep their client on track to complete their required items.
The seller retains ownership of the policy throughout the contract phase as the last steps are the transfer of ownership and change of beneficiary on the policy. Once those are complete, the funds are released to the seller from an escrow account and either wired to their bank account or sent a live check, whichever is preferred.
Negotiation
Bidding
Contract
Life settlements, also known as a viatical and senior settlements, have a lot of similarities to selling a home. There's the initial consultation about your potential value, coaching on what we need to do to get your case ready for market, there's the bidding and negotiation process, and then there's the offer acceptance, contract and legal due diligence, and the close of escrow.
All in all it typically takes 3 months on average to do a life settlement, so don't wait until your premium is due, get started now. Sometimes it can be done faster, but 3 months is typical. The policy is still yours until the settlement is complete, and in some states you can still cancel up to 15 days after the close of escrow.
In real estate you can list your own home if you like, but most people hire a realtor because there's a lot that goes into listing a home, pricing it right to be competitive, and staging it right that will either attract buyers or turn them away. When people self list their home as For Sale By Owner, oftentimes they price too high and are forced to consider low ball offers. If the house sits on the market too long, buyers become weary of what might be wrong with the property, and their intent to save a few bucks has actually cost them significantly more in the long run. And same goes with the life settlement marketplace.
You can technically try to sell your own policy and get an offer directly, but chances are you're not an expert on the life settlement market and may be lucky to get any kind of offer at all if you just go to one or two places. Will you know if that offer is good or bad? Not unless you've had many more investors review your case and place a bid will you know the top of your potential, and that's what we do as life settlement brokers.
Who does a life settlement broker represent? They represent the seller throughout the entire process, and want you to be happy whether you decide to settle or not.
A great place to get started is with a free appraisal using the form on this page; it shouldn't take you more than 30 seconds to complete. We will use the basic information you provide to determine if your case qualifies, and provide a ball park figure to give you an idea of what your policy might be worth. We look forward to helping you.
Life insurance is an asset owned by the majority of America adults (61%). Note that this 61% penetration rate is essentially at parity with home ownership (64%), and higher than that of 401(k) retirement account ownership (53%). Life settlements, or life insurance settlements, allow individuals to sell their life insurance policy in a secondary market. (1)
What Makes A Good Case?
When investors review a case, there are a variety of numbers they are crunching to determine whether or not they want to bid on a policy. There are over 800 life insurance companies in the U.S., and while all contracts will be honored as regulated by the federal government and at the state level with the department of insurance, not all policies are created equal.
You'd be surprised to find that some people pay significantly more for the same amount of coverage than others, and that can be based on the age when you started it, your health at the time, the type of product, and the luck of the draw on which carrier you were sold way back when I suppose.
Some life insurance products are simply priced more competitively while others fulfill a certain niche and may not have been a good investment in the long run. We can help you figure that out pretty quickly.
When we run an in-force illustration on your policy we will be able to tell how expensive your policy will be in the years to come. The other piece investors are looking at is the underwriting, which is done simply using the last 5 years of your medical records. Based on your current age and ailments, the underwriter will use certain mortality tables to come up with the number of months and years they believe you are likely to live.
Understanding it's a little odd to review this information, it's important to keep in mind that it's just numbers and nothing is in-fact. None of us know exactly how long we have, so some people with the same health concerns will pass earlier than predicted while others will live longer than expected, and the investor has to take that into account.
Real Life Example
When we have a 65 year old that's in good health and has absolutely no health issues, it makes it very hard for the underwriter to predict the life expectancy as there's nothing at this moment that says this person will not live to age 100. Of course that could change, but we have to crunch the numbers now using today's information.
Oftentimes clients call me and tell me how poorly they are doing, but the only bit that matters is the documented health concerns that have been recorded by a doctor. If you don't visit the doctor regularly, that will also make underwriting difficult, so it would be a good idea to schedule an exam so we have at least something to go off of. When there are no medical records, some buyers can make an offer off of just a medical questionnaire, but you're likely leaving money on the table if we don't use traditional medical records.
Now that the investor has a good idea how long they will have to pay premiums on the policy, and also understanding exactly how much those premiums are going to cost, they can calculate whether or not the investment is likely to be profitable or a loss. A good way to think about it is the investor is essentially loaning money and needs to make a certain annual interest rate for that loan to make sense. They are loaning money to pay the settlement and pay future premiums, and will not be paid back until the policy matures, so they're solving for a reasonable annual interest rate. The longer they have to loan money, the more compound interest accrues, which is why the 20 year life expectancy is lot more challenging to find an offer, but it is possible.
Set Realistic Expectations Going In
When clients first consider a life settlement, sometimes their expectations are over the moon, meaning if they have a $500k death benefit they're thinking that an investor will pay them $500k now for their policy, or close to it, but once you factor in future costs and the time value of money, that doesn't really make any sense. In fact, most consumers that own a life insurance policy only think of the death benefit, and don't really take into account how much it costs to get there. When a client considers an offer they often get stuck on the death benefit number only, and what they're losing, but it's important they also factor in future premiums and the likelihood at this point that they're going to pass in the near future.
The point of life insurance is to cover the catastrophic loss if the insured dies earlier than expected, and this type of coverage is important, but for most of us we will live a long life. And depending on your policy the longer you live the more expensive the cost of insurance becomes. For people that are fortunate to live a longer life, they are unfortunate in the amount of money they will spend on life insurance. And when that cost of insurance becomes too much for an individual to cover, an investor has the capital to pick up those costs if the investment looks reasonably profitable in the long run.
When people start to understand these concepts, they often assume that someone with a very short life expectancy is the only cases that are interesting, but this is also not necessarily true. When someone has been given less than 2 years to live it is true that they will likely receive a significant portion of their death benefit and also receive a lot of offers, but it also means the investor has to put up a lot of money to buy it, and that's not always appealing to every group.
Find the Solution That is Perfect For You!
Some buying groups may be looking to buy policies in the 5 - 10 year life expectancy, or even longer such as 15 or 20 years. The difference being the initial capital needed to purchase it, and the ability to wait longer for the return on investment. Someone with a 20 year life expectancy may very well fall ill and pass earlier, and yet they may live longer than 20 years too, so there is more risk and potentially a much longer profit cycle but for less of an investment upfront.
While offers that come in can range significantly, ultimately we will know when an offer is fair and reasonable, and we will do our best to help you understand what's at stake. We also do our best to stretch investor's budgets to get you as much as we can. Learn more about settlement options life insurance or give us a call with any of your questions!
Get started by spending less than a minute to fill out the free appraisal form on this page, and we'll be in touch with feedback promptly. Learn more about a common question we get, "can I sell my term life insurance policy" or reach out and we would be happy to speak with you and answer any of your questions.
Zack Taylor
4 years in life settlements