Ever since life settlements originated, there have been “provider direct” firms that advertise directly to seniors, offering to purchase their life insurance policies outright for slightly more than the cash surrender value.

This can seem tempting to seniors who perhaps weren’t aware that their policy could be worth anything at all above the cash surrender value. However, in this case, what they don’t know can hurt them - at least financially.

Seniors who opt for these provider direct transactions stand to lose thousands of dollars in by dealing directly with a provider, rather than going through their financial advisor and a life settlement broker. Here’s why.

“Provider direct” settlements eliminate any competition for the senior’s policy.

When a provider deals directly with a policy owner, that provider is eliminating any competition for the policy. As we all know, no competition means a buyer can offer lower prices - which means that the senior is getting a less money than he or she might be entitled to.

The only entity that stands to benefit in this scenario is the provider. Oftentimes, they get to pay less than fair market value for the policy, meaning that their profits after collecting the death benefit will be higher.

But what about the senior? What if he or she is in need of cash to pay for medical bills or an assisted living home? What if the money is needed to supplement a diminishing retirement fund?

Whatever the money is being used for, every policy owner is entitled to receive fair market value for their life insurance policy, which they’ve been paying into for decades - and which, after all, is property just like a house or a car.

Provider direct firms reach out to financial advisors, too

Not all provider direct firms market directly to seniors. Some contact financial advisors, offering to help the advisor set up a life settlement for his or her clients without going through a broker.

Since many advisors are unsure of how the life settlement market works anyway, this tactic can be somewhat confusing. Many advisors may not realize that the transaction ought to take place between a broker and a provider - not a provider and an advisor or policy owner.

This is because providers’ only responsibility is to the investors they represent. They aren’t bound, by law or ethics, to secure the best price for the policy owner. They’re bound to secure the best price for their investors.

A broker, on the other hand, represents your client’s best interests. It’s a broker’s job to create a bidding war for your client’s policy that ensures the policy owner is getting fair market value for the policy.

We’ve seen cases in which brokers were able to secure policy owners prices many times greater than providers initially offered.

In one case, an advisor worked directly with a provider to get a bid on a client’s life insurance policy. Thinking the bid was surprisingly low, he came to Ashar. After we shopped the policy around to various investors, we were able to secure a price 800 percent higher than the original price the provider had given the advisor.

Your clients place a huge amount of trust in you to represent their interests to the best of your ability. Embarking on a life settlement without using the services of a life settlement broker can mean your client gets much less for their policy than they otherwise could.

To learn more about why brokers are so important in life settlements, read our post “Why Financial Advisors Owe It to Their Clients to Go Through a Life Settlement Broker.”