Determining Who Should Buy Your Life Insurance
Like any asset, such as a house or a car, your life insurance can be sold to a third party for a price, known as a life settlement.
Life settlements first began in 1911, as a result of the Grigsby v. Russell decision by the U.S. Supreme Court. The ruling set the precedent for the Health Insurance Portability and Accountability Act (HIPAA) — instated by President Clinton in 1996 to permit the sale of a life insurance policy to a third party.
There are many reasons why you may choose to sell your life insurance. Perhaps you’re looking for a means to supplement your retirement income, or you need the cash to offset the costs of a loved one’s long-term care.
Or maybe your kids are grown and a life insurance policy no longer makes sense for you. As you consider whether to pursue a life settlement, you’ve likely run into the terms “life settlement broker” and “life settlement company.” It’s easy to confuse the two titles, but they are not interchangeable. So what is the difference?
Life settlement brokers
Simply put, a life settlement broker represents you, the policy owner, directly, and has a fiduciary responsibility to procure the best possible deal by presenting your policy to as many buyers as possible. By creating a competitive bidding environment, a life settlement broker helps boost buyer interest, ensuring a much higher selling price.
A life settlement broker will work with you to determine whether your insurance policy qualifies for a life settlement, and what that value might be. He or she will also manage the specifics of your transaction, which frees you from getting entangled in the details.
Life settlement brokers follow a pay-for-performance model. Since their commission is usually deducted from the proceeds of a sale, you won’t be required to dig into your pockets to cover their fees. Brokers may also assume the costs of valuation and underwriting, which tend to be quite expensive. Plus, if you don’t sell, you don’t pay — an attractive benefit for policy owners, and an added incentive for brokers to secure a lucrative settlement.
What to look for in a life settlement broker
Licensing: Because life settlement contracts are generally regulated by state law, brokers must be licensed. You can verify licensing through your state insurance commissioner.
Fees: Determine if a broker’s fee is a percentage of your policy’s face value, a percentage of the agreed-upon sale price of the policy, or a percentage of the value created (the difference between the offer and your policy’s cash surrender value). Once you do the math, you can decide if the calculations work for you. Typically, you can expect a broker’s fee to be less than 6% of your policy’s face value or 30% of its sale price.
Transparency: Keep in mind that a good broker will take the time to walk you through the various contracts, agreements, and disclosures that you’ll be required to sign.
Buyer network: A strong buyer network will directly impact the number and value of bids your broker receives on your behalf.
Past successes: Be sure to question any potential brokers about prior transactions, from the number of deals they have closed to the average sale price, relative to face value, of the settlements they have handled.
LIFE SETTLEMENT COMPANIES
Life insurance policies are valuable assets that, consequently, attract investors. A life settlement company represents the investor, and will often act as a buyer on their behalf. They may even purchase the policy for their own portfolio.
Unlike life settlement brokers, life settlement companies do not work on commission. It’s important to note, however, that the probability of receiving a lower offer is high. That’s because a company’s goal is to increase their chances of a higher return later.
WHAT TO LOOK FOR IN A LIFE SETTLEMENT COMPANY
Licensing: You should always work with a licensed company. Licensing can be verified by contacting your state insurance commissioner.
Policy diversity: Be sure to select a company that accepts multiple types of policies and is able to address your particular needs.
Ease of process: Take some time to understand a company’s application process. Can files be obtained and submitted digitally? Are forms clear and easy to navigate?
Positive reviews: See what others have to say. Client testimonials offer valuable insight into what to expect from a partnership with a potential company.
THE BOTTOM LINE
You’ve likely run into the life settlement broker versus life settlement company arrangement before. Imagine for a moment that you’ve decided to buy a home. You could go the company route and navigate the market, mortgage process, and negotiations on your own. But unless you are well-versed in real estate, you could run the risk of losing thousands in a weak deal. Or you could choose to work with a broker, which puts someone by your side who can guide you through the nuances of the industry and increase your likelihood of a gainful negotiation.
In summary, enlisting the help of a broker or a company offers different advantages. We hope that with this information in hand, you can gauge whether a partnership with one or the other works best for you.