Chapter 2
Chapter 2
It’s important to distinguish between brokers and providers: the two primary types of companies that operate in the life settlement industry. Like real estate, when you sell your life insurance policy, the policy is sold "over-the-counter" in private transactions between sellers and buyers. There is no perfect market like Amazon for life insurance. Traditionally, life settlement brokers facilitate the transfer of the policies between the seller of a policy and a buyer.
What do they do? Brokers represent the individuals who are selling an existing life insurance policy to a life settlement buyer. It is an optional representation, and when represented by a broker, that professional will solicit offers for the policy from life settlement providers who will buy the policy.
The current landscape of traditional life settlement brokers is a fragmented market of small brokerages - there are no large dominant brokers in the market. If you are thinking about pursuing a life settlement, it might be a good idea to work through a broker who can help you navigate the process and realize a more competitive value - especially if you are not comfortable handling financial transactions similar to selling a house.
That being said, it's possible to sell a policy without a broker by contacting buyers yourself. Furthermore, brokers often charge a hefty commission for their help - sometimes taking up to 30% of your settlement offer. The benefit of not using a broker is that you do not have to pay a broker's commission, but the downside is that you will have to navigate the process on your own - which is possible by educating yourself online.
Finally, it's important to know that some brokers can obtain life settlement offers for free. These offers are non-binding to you but binding to the buyer for a period of time (in other words, you can walk, but the buyer cannot!).
If you'd like a quick estimate of your policy's potential payout based on industry averages, try our life settlement calculator. There are several key considerations when selecting a life settlements broker to partner with you in pursuing a life settlement transaction.
The life settlement industry has a somewhat complex past of brokerages charging abnormally large commissions before the industry was regulated - without the consumer having a good upfront view into what the broker’s commission would be. Thanks to life settlement regulation, today commissions should be disclosed up front and are now capped based on the state's regulation. Some companies may charge a contingency commission that is dependent on the size of the life settlement offer obtained.
The maximum commission in most states is 30% of the settlement value. That being said, commissions have decreased on average over the years and some brokers charge less than the 30% cap. Make sure to ask for more information on this when you begin your research and before you sign a contract with a life settlement broker.
Keep your wits about you and use your best judgement to make sure that your broker has your interest at heart. It is important to ask upfront that they will solicit life settlement bids in an objective manner, which means they are seeking the highest bid for you.
In the past, life settlement brokers have sought the bids that would benefit themselves more than their clients. An example of this would be pushing you to accept the first offer rather than taking the time to shop the policy. A fast transaction lets the broker collect their commission more quickly and move onto the next case - just like a real estate agent.
Confirm that the life settlement broker is fully licensed in the appropriate state. If the broker is not licensed in the appropriate state, then that company may have to contract out to another life settlement broker who is licensed.
Your privacy is important. Use common sense about it - Make sure that the life settlement broker protects your information and only sends your files to only the parties necessary to produce offers - usually only life settlement providers and life expectancy underwriters (discussed in Chapter 5). When you sign your brokerage agreement, this will generally be included in the agreement and you should make sure it it. The files in the brokerage agreement will include confidential health and insurance records. There is no reason for a broker to send your information to anyone else who is not involved in this process.
On the other side of the negotiating table, you have life settlement providers which are companies that are licensed to purchase life insurance policies on behalf of large institutional investors. In order to purchase more than one third-party life insurance policy per year, a company must be a licensed life settlement provider. Sometimes a provider themselves may also be an investor. All reputable life settlement investors utilize life settlement providers for origination.
Providers have expertise in evaluating the investment quality of a life insurance policy, and make bids for policies based on the policy characteristics, the insured's life expectancy and the interest rate environment. Once acquired, the life settlement provider often resells those life insurance policies, or sells fractional interests in them (if they are a FINRA registered/licensed investor), to a group of investors.