Agents and advisers to seniors have an exciting financial planning tool -- life settlements -- available to them and their clients. Some agents, advisers, and companies use life settlements as part of what they offer clients.
Although much has been written about the uses of life settlements, many advisers and agents seek or should seek more knowledge than just how to use life settlements. Financial professionals not only need to understand how to use life settlements but also need to understand the settlement business. The producer must recognize the importance of a good case, how to market to clients, and how to take the case to the market for the client's best advantage.
The producer can start by looking at the players in the industry: providers, brokers, and vendors. Providers are the companies that purchase the policies, usually backed by institutional capital. Brokers are companies that take policies to the market of providers for purchasing. Vendors provide such necessary services as medical underwriting.
Providers purchase policies, and to that end they represent investors with money to purchase policies. Brokers take the policy to the entire market that is open to them. This is to ensure: a) obtaining an offer; some providers may be interested in purchasing a particular policy while others will not be, and b) obtaining the best offer possible on each case. In one case it may be from provider A, in another case it may be from provider B, and in another it may be from provider Q. To this end, brokers represent the client.
Additional roles or services that providers and brokers may be able to provide pertain to such issues as compliance, licensing, and errors and omissions insurance. Not all states require licensing to do business in their state. Some states require a license only for viaticals, cases with a shortened life expectancy, and not for life settlements; others require a license for both viatical and life settlement cases. Some states provide that the agent's life license will suffice for him to operate as a broker, while other states have no requirements.
The producer should ask the company, provider, or broker with which he or she works if the firm has a compliance department and if that department is available to producers working with the firm for assistance in getting whatever license may be required to handle a case. The case must follow the requirements of the state in which the policy owner lives or in which a trust resides.
A provider or broker also may be able to help educate and market to clients. The more astute brokers have selling systems, and some may be able to private label and adapt their selling system for the producer. In addition, some groups can provide continuing education credits that educate producers about life settlement options.
Brokers may have exclusive sources or providers with institutional money available to them that are not available to others. Access to more funding institutions may result in greater market value for a specific case.
Errors and omission insurance can be provided through providers and brokers. If the producer works with a broker that has errors and omissions coverage available, the producer has more coverage than if he works with only a provider that has coverage.
Offers on the same case may vary. Many advisers believe they need to send their case to only one company that purchases policies and they have everything covered. Each provider receives its funds from a different source or funder. In most cases, we are talking about institutional sources. These money sources have given not only money to the provider but also a set of rules for purchasing policies. This becomes the provider's pricing model by which it determines its offers.
Pricing models also include such variables as not purchasing a policy with a face amount of less than X amount of dollars or more than Z amount of dollars. Life expectancies of not less than X years or more than Y years also are dictated in pricing models. Providers also may differ as to what companies' life expectancy reports will be used. Each life expectancy report received may be different for the same person. A case may not even fit in some providers' pricing model to make an offer.
If a case fits both provider A and provider B, the aggressiveness and return of investment hoped for will affect the offer. In addition, the offer may depend upon competition in the market.
To add to this, policies themselves can be complex. There have been cases where an offer was made and a knowledgeable, savvy broker broke down the policy components to restructure it and sold for a higher offer. In addition, the producer must stay on top of each provider's pricing models to know which case is more likely to be purchased by which provider. Providers' pricing models also can change.
What about commission? This too can be complex. The usual top commission level now is 6% of the death benefit sold. It takes a great deal of volume to get that level. To achieve that level on a case, the offer to the client also must be over a larger percentage of face amount. The producer cannot make more than the client.
The producer needs not only the high contract but also the best offer to get the top level of commission. That is done by policy packaging, policy structuring, negotiation, and taking it to a large market of providers. No one provider can purchase all cases.
A contract between a broker and producers who work through it can go as high as 5%, depending upon the volume the producer does with the broker. The spread is compensation for the broker for industry knowledge, contacts, packaging, structuring, negotiating, and the time cases may take.
Commissions can be diluted if the policy is shopped by too many sources that take it to the same providers. If the high offer comes from provider C and the policy has been offered to it by more than one source, which often happens, the applicable commission could be diminished by being allocated to multiple sources.
Why do some cases not receive offers? Providers may not be interested in making an offer or purchasing a policy because it does not fit into their pricing model. The most common reasons a case will not fit a pricing model are:
o Some companies accept longer life expectancies than others; there is a point, however, that no company will pass.
o Premiums may be too high in relation to face value.
o Cash surrender values in excess of certain percentages make it not feasible for a purchasing company to pay out more than the surrender value.
Not offering or using life settlements to the fullest will allow other advisers who may be working with a client to provide that service and solidify their relationships with the producer's client. Understanding when to use a life settlement and how life settlements can benefit a client adds value to the producer's services. Understanding how the business operates gives the client full benefit and value
