Halloween is behind us and many of you may have walked through a corn maze with your children or grandchildren at a local pumpkin patch. You may have found that maze easy to navigate, but how do you navigate through the confusing maze of life settlement information to help your client monetize their policy for fair market value (FMV) rather than settling for a discounted value?
The path you choose will determine how much value created ends up on the policy owner/sell-side of the negotiation table versus the buy-side. One wrong turn in the maze can take you and your client down a path that enhances investor returns at the expense of providing more value to your client. We will show you how you can help your clients make an informed decision about choosing the right life settlement company at a time when they are being bombarded with life settlement marketing that can often blur the lines between truth and fiction.
An existing life insurance policy, including convertible term insurance, may contain significant value, beyond the cash surrender value (CSV), that can be accessed and monetized through a life settlement. A life settlement is the sale of an existing life insurance policy for an amount greater than the CSV, but less than the death benefit. How much added value your client receives is totally dependent on which life settlement company they choose to represent them. The good news is that there has been life settlement regulation in place for several years that requires licensing that distinguishes between a seller’s representative and a buyer’s representative. Securing independent representation for your client is the cornerstone of a successful life settlement.
Brokers vs. Providers
There are only two licensed entities that are licensed to handle life settlement negotiations. One represents the seller, the other represents the buyers. Licensed life settlement brokers are fiduciaries to the policy owner. Their sole responsibility is to represent the policy owner in the life settlement transaction and obtain the best offer based on your client’s situation and needs.
On the buy-side, life settlement providers are licensed to represent the best interests of the buyers. Most advisors are unfamiliar with the term provider, which is often conflated with the term buyer. As a result, advisors often unknowingly end up on the wrong side of the negotiation table working with a provider. Consumers are even more vulnerable because of constant consumer direct ads from providers on television and social media. If your client responds to an advertisement and gets involved with a “Direct Buyer”, then they are in fact dealing with a provider. Buyers are behind the scenes and prohibited from getting directly involved with the seller. Buyers must be represented by a provider. The only way your client’s best interests are protected is through a broker-managed life insurance policy auction forcing providers to compete.
Your client should only use one broker that forces provider competition because all brokers access the same providers. If providers receive information from two or more brokers, control of the case is lost resulting in a more discounted offer to the seller. Providers can’t trust information that comes from more than one source. Also, sensitive client information is more secure if properly handled by only one broker. When providers are forced to compete that means your client’s case can be looked at by all available institutional buyers.
Two due diligence questions to determine if a life settlement company is on the buy-side or sell-side
Ask your potential life settlement resource these two questions:
- “Are you a licensed life settlement broker or a life settlement provider”? Have them produce their license for your state if you’re not sure. You can also visit their website to find the answer. Sometimes you must read the fine print. If you discover that they are a licensed life settlement provider, then they are a buyer’s representative. Providers will gladly help your client sell their policy directly to the buyer, but they can’t serve two masters. They have a fiduciary duty to the buyers, not your client. Many life settlement resources are just lead generation companies and are not licensed to represent either side of the table. Do you really want a lead generation company to have access to your client’s sensitive health information?
- “Do you conduct a life insurance policy auction forcing providers to compete?” Only a nationally licensed life settlement broker has the licensing and the expertise to conduct a successful life insurance policy auction forcing providers to compete. However, any insurance agent that wants to receive a commission from a life settlement, must first be appointed as a life settlement broker. They may complete one or two life settlement cases per year. They do not have the staff, national licensing, or expertise to run the policy auction. Make sure your resource is a nationally licensed life settlement broker. Fiduciaries do not take commissions but can charge fees for life insurance valuation and other services provided by a life settlement broker.
Bottom line: There are only two licensed entities that sit at the negotiation table. Life Settlement Brokers represent your client’s best interests, Life Settlement Providers represent the buyer’s best interests. The first step is to verify right up front that the life settlement company you choose to help your client is a seller’s representative. Starting out on the right foot will help you have a big impact on the amount of additional value your client receives.
Ashar Group is a nationally licensed life settlement brokerage firm and a qualified appraiser of life insurance for estate and tax planning, charitable donations of life insurance, and other aspects of financial and retirement planning. It’s what we do. By remaining deliberately independent and conflict-free, advisors trust Ashar to protect the best interests of the policy owner during a life settlement, thereby mitigating reputational or liability risk for the advisor.